Falconbridge Limited 2006 Annual Report

Annual Report 2006 02 Chairman’s Statement 05 Chief Executive’s Report Business Review 15 Business Overview & Strategy 16 Group Strategy 20 Commodity Business Strategies 22 Principal Risks & Uncertainties 26 Key Performance Indicators 29 Markets 40 Financial Review 56 Operational Review 57 Xstrata Alloys 61 Xstrata Aluminum 63 Xstrata Coal 69 Xstrata Copper 80 Xstrata Nickel 85 Xstrata Zinc 94 Xstrata Technology 96 Sustainable Development 101 Operations Data 106 Board of Directors 108 Executive Management 109 Directors’ Report 115 Corporate Governance Report 126 Remuneration Report We will grow and manage a diversified portfolio of metals and mining businesses with the single aim of delivering industry-leading returns for our shareholders. We can achieve this only through genuine partnerships with employees, customers, shareholders, local communities and other stakeholders, which are based on integrity, co-operation, transparency and mutual value-creation. 140 Statement of Directors’ Responsibilities 141 Independent Auditors’ Report Financial Information 143 Consolidated Income Statement 144 Consolidated Balance Sheet 146 Consolidated Cash Flow Statement 147 Consolidated Statement of Recognised Income and Expenses 148 Notes to the Financial Statements 251 Supplementary Information 251 Pro Forma Consolidated Income Statement 252 Notes to the Pro Forma Consolidated Income Statement 253 Pro forma Segmental Analysis 259 Review of the Fair Value Adjustments Parent Company Financial Statements and Related Information 260 Statement of Directors’ Responsibilities 261 Independent Auditors’ Report 262 Balance Sheet 263 Notes to the Financial Statements 276 Shareholder Information Xstrata is a major global diversified mining group, listed on the London and Swiss stock exchanges and headquartered in Zug, Switzerland. Xstrata maintains a meaningful position in seven major international commodity markets: copper, coking coal, thermal coal, ferrochrome, nickel, vanadium and zinc, with a smaller but profitable aluminium business, recycling facilities, additional exposures to gold, lead, cobalt and silver and a suite of global minerals and metals processing technologies. Xstrata’s operations and projects span 19 countries and employ over 43,000 people, including contractors. Xstrata’s activities are organised into six global commodity businesses and a technology business, each of which operates with a high level of autonomy. XA alloys Xstrata Alloys is the world’s largest producer of ferrochrome and a leading producer of primary vanadium. Xstrata Alloys also owns carbon and anthracite operations which supply key raw materials to its ferrochrome smelters and an interest in a joint venture platinum group metals mine and concentrator. aluminum Xstrata Aluminum operations include a US-based primary aluminium smelter, supplied by an alumina plant in the US and a bauxite mine in Jamaica (both 50% owned), together with Norandal, a fabricated products business comprising four modern rolling mills in the south-eastern USA. XAl XC coal Xstrata Coal is the world’s largest exporter of thermal coal and a significant producer of premium quality hard coking coal and semi-soft coal. Headquartered in Sydney, Australia, Xstrata Coal has interests in over 30 operating coal mines in Australia, South Africa and Colombia and an exploration project in Nova Scotia, Canada. XCu copper Xstrata Copper is the fourth largest global copper producer, with mining and processing facilities located in Australia, Chile, Peru, Argentina and Canada. It also manages a recycling business (Noranda Recycling) with plants in the USA and Asia. Xstrata Copper’s world-leading portfolio of growth projects includes Las Bambas in Peru, Tampakan in the Philippines, El Morro in Chile, El Pachón in Argentina and Frieda River in Papua New Guinea. XNi nickel Xstrata Nickel, headquartered in Toronto, Canada, is the fourth largest global nickel producer and one of the world’s largest producers of cobalt. Xstrata Nickel’s operations include five mines and processing facilities in Canada, a ferronickel mine and processing facility in the Dominican Republic and a refinery in Norway. Xstrata Nickel’s promising portfolio of growth projects includes Nickel Rim South in Canada, Kabanga in Tanzania, and Koniambo in New Caledonia. XZn zinc Xstrata Zinc is one of the world’s largest miners and producers of zinc. Xstrata Zinc’s operations span Spain, Germany, Australia, the UK and Canada, with an interest in the Antamina copper-zinc mine in Peru. Xstrata Zinc’s growth projects include interests in the Lady Loretta deposit in Queensland, Australia, and the Perseverance zinc deposit in Quebec, Canada. technology XTech Xstrata Technology develops, markets and supports technologies for the global mining, mineral processing and metals extraction industries. These include the ISA PROCESS™, ISASMELT™, IsaMill™, Jameson Cell and Albion Process technologies, which are successfully marketed globally to major mining companies and used at a number of Xstrata’s own operations to improve efficiency and reduce operating costs. PHILIPPINES CANADA PA PU A N EW G U I N EA Darwin Québec Sudbury Toronto Montreal AUSTRALIA N EW C A L ED ON I A CANADA UNITED STATES Havana New York CUBA DOM INICAN REPUBLIC JAM AICA Puerto Bolivar COLOM BIA Coffs Harbour Muswellbrook Townsville Mudgee Mount Isa Newcastle Sydney Brisbane NO R WAY Lima PERU UNITED K INGDO M Bremerhaven Berlin Arica Antofagasta London GER M ANY F R ANC E Belén ARGENTINA SPAIN UGANDA BRAZIL Nairobi Brasília Dodoma TANZANIA Rio de Janeiro Witbank Johannesburg SWAZILAND SOUTH AFRICA SOUTH AFRICA Johannesburg SWAZILAND = Operations Alloys = Projects Coal Copper Nickel Zinc Recycling City/Town Aluminum Xstrata plc Annual Report 2006 | 01 I Three major acquisitions completed in 2006, Cerrejón coal, Tintaya copper and Falconbridge Limited, transforming Xstrata and creating an exceptional range of organic growth options Investment grade credit rating maintained following cash acquisitions of $19.6 billion. Gearing ratio of 41% at year end and pro forma operating cash flow of $9.4 billion Falconbridge integration successfully completed at year end, with annual synergies of $545 million confirmed. Work continues to unlock further synergies from the Sudbury basin, in partnership with CVRD Prices for key mining inputs continued to climb in 2006, in particular for labour, mining consumables and equipment I I I I I Real cost savings of $56 million achieved by former Xstrata businesses, in a challenging environment Increased resources confirmed at Wandoan (thermal coal), Mount Isa, Alumbrera, Antapaccay, Las Bambas and Tampakan (copper), Raglan, Kabanga and Araguaia (nickel) New projects commissioned on time and on budget at Rolleston thermal coal, Lion ferrochrome, Wollombi coking coal, Mototolo PGM and Lennard Shelf zinc-lead I All data is provided on a pro forma basis, including the acquisitions made in 2006 from 01.01.05 and 01.01.06. Revenue US$m 05 17,199 26,877 EBITDA US$m 05 5,843 10,441 EBIT US$m 05 3,932 8,340 Attributable profit US$m 05 2,232 4,885 06 06 06 06 56% pre exceptional items 79% pre exceptional items 112% 119% Earnings per share US$ 05 2.52 5.13 Cash generated from operations US$m 05 4,667 9,370 Net assets per share US$ 05 13.57 20.82 Dividends per share US¢ 05 30.5 41.6 06 06 06 06 pre exceptional items Pro forma weighted average number of shares calculated as if the share issues in 2006 had been made on 01.01.05 and 01.01.06. 104% 101% Assets relate to statutory balance sheets at year end. 53% 2005 dividends adjusted for rights issue impact. 36% Revenue by origin North America 39% Africa 6% Europe 10% Australasia 18% South America 27% Revenue by destination North America 33% Middle East & Africa 2% Europe 32% Australia 3% South America 5% EBIT by origin Europe 6% North America 22% Africa 4% Australia 25% EBIT by commodity Zinc 20% Nickel 11% Aluminium 2% Alloys 3% Coal 11% Asia 25% South America 43% Copper 53% 02 | Xstrata plc Annual Report 2006 Chairman’s Statement 2006 was a seminal year for Xstrata. Against a backdrop of another year of strong commodity prices, with exceptional rises in base metals prices, Xstrata’s management successfully completed one company-transforming and two incremental acquisitions, with all three fully integrated by the end of the year. The strong sales prices for our products, together with the contribution of acquisitions, led to another record year of profits. Xstrata starts 2007 as the fifth largest public mining company in the world, with outstanding organic growth prospects, a strong balance sheet and a diversified suite of cash generative and efficient operations, in the hands of motivated and entrepreneurial management teams. Xstrata’s growth and transformation has taken place during an exceptional time in the commodity markets. Five years ago Xstrata plc began its growth trajectory in very different markets to today with commodity prices near their all-time lows. Last year marked the third consecutive year of higher commodity prices for most products, as the industrialisation and urbanisation of China, and to a lesser extent India, continues to drive increased demand for metals and energy, at a time when Asian, European and even US economies remain resilient. The acquisitions completed prior to 2006, together with the assets and growth projects added to the portfolio during the year, have enabled Xstrata to capture the benefits of these prevailing, strong commodity markets, generating significant returns for shareholders and providing an excellent basis for further organic and acquisition-led growth. The operational performance of the assets was also commendable. One of the great strengths within the Group is the continual push for operational excellence, with our management teams again trimming the operating cost base this year, despite considerable cost pressures and high commodity prices that can often lead to a more permissive approach to cost control. We will also realise significant cost savings of over $545 million each year from the integration of the Falconbridge assets into our business and I have no doubt that, as with the acquisition of MIM Holdings Limited in 2003, Xstrata’s devolved business structure and entrepreneurial approach will enable further productivity improvements in the next several years, further strengthening the Group’s competitive position. Governance, corporate responsibility and sustainable development In May 2006, David Issroff, non-executive director, resigned from the Board. David had been a non-executive director of Xstrata since February 2002 and a director of the former Xstrata AG since May 2000. On behalf of the Board, I would like to recognise David’s significant contribution to the Group’s success and wish him well for the future. I also pass on my thanks to my fellow Board members, whose work as part of the main Board and its active health, safety, environment and community (HSEC), Audit, Remuneration and Nomination committees continued to provide strategic direction and oversight of the Group’s activities. Further detail about the Board’s committees and activities in 2006 is provided in the corporate governance report included in this document. Xstrata plc Annual Report 2006 | 03 Xstrata’s commodity businesses continued to make good progress towards our goals of zero harm in the workplace, continuous improvements in our environmental performance and enhanced dialogue with and support for the communities associated with our operations. Year on year reductions were achieved in the frequency of total recordable injuries, which improved by 13% overall, excluding the Falconbridge business. As an important part of the integration of Falconbridge into the enlarged Xstrata Group, rapid assessments of each former Falconbridge site’s risk management, health, safety, environmental and community systems and performance were completed. By the end of 2006, Xstrata's sustainable development framework had been rolled out across these operations and our teams are working to address areas of under-investment and improve performance. Responsibility for HSEC performance has been devolved to empowered commodity business management teams, and, as with the MIM acquisition, we are increasing dedicated HSEC resources at the operational level to achieve Xstrata’s best practice standards. From the outset, we identified that one of the attractions of the Falconbridge business was the exceptional skill set of its operational employees and management. I am therefore particularly pleased to report that employee turnover improved from 10% to 5% in 2006, including the businesses acquired. This demonstrates our success in retaining a very significant proportion of the men and women from the former Falconbridge business within the Group. Their technical and project management skills, in particular, are already making a contribution to our existing operational teams. We continue to maintain intensive behavioural safety and major hazard management programmes, in particular at our South African operations. Although we have consistently maintained that the behavioural and cultural changes we need to effect will require an intensive effort over a longer period of time, we are beginning to see marked improvements in the management of major hazards in South Africa. These include reductions in the types of incidents previously identified as the leading causes of fatal incidents, such as fall of ground and collisions between pedestrians and moving vehicles in underground mines. A key area we have identified for further improvement in 2007 is our influence on and monitoring of the safety performance of contractor personnel. However, the very real progress Xstrata’s operations have achieved in safety performance since 2002 does not mean that the task we have set ourselves to eliminate injuries or fatalities is in any way complete. I regret to report that one fatality was sustained at a South African operation last year. Tragically, four fatalities have occurred in the early part of 2007, of which three were in South Africa, reinforcing the enormity of the challenge that faces us in effecting sustainable changes in the way employees and contractors think and behave across the Group. These incidents only increase our resolve to eliminate fatalities, illnesses and injuries from our business and we continue to dedicate significant resources, time and energy to achieving this aim. 04 | Xstrata plc Annual Report 2006 Chairman’s Statement In line with the rapidly evolving best practice and legislative standards for corporate reporting, this report includes a brief overview of Xstrata’s key sustainable development initiatives for the first time. We have also provided increased disclosure on the future trends, principal risks and uncertainties facing our business, and further expansion of the strategy and key performance indicators we reported for the first time last year. We have again published a comprehensive standalone Sustainability Report, available from our website or as a hard copy on request from mid-April 2007. As ever, we welcome feedback or comments on this report or the Sustainability Report and have provided contact details on the inside back cover. Feedback can also be posted via our website at www.xstrata.com/feedback. Outlook and prospects The Board’s confidence in the outlook for Xstrata has led to a further increase to the final dividend, to 30¢ per share. Taking account of the discounted rights issue completed in October to refinance a portion of bridge financing for the Falconbridge acquisition, the interim dividend of 13¢ per share has been rebased to 11.6¢ per share. This brings the full year dividend, on an adjusted basis, to 41.6¢ per share, some 36% higher than the adjusted prior full year dividend. Despite several challenges ahead, including increased volatility in the commodity and equity markets, concerns over the disappointing performance of the US economy, increased competition for skilled labour and rising prices for mining inputs, the outlook for the mining and metals sector remains very encouraging in 2007. Commodity prices look set to continue to exceed long-term averages, with no sign of an abrupt end to the favourable environment for Xstrata’s products. Xstrata’s management team has again pursued a consistent strategy and demonstrated outstanding entrepreneurial vision in creating value for shareholders and positioning the Group for future growth. Xstrata’s prospects remain very robust, supported by a strengthened portfolio and improved competitive position, the operational excellence and continued efforts of our employees worldwide, and the support of our shareholders, for all of which I extend my thanks. Willy R Strothotte Chairman Xstrata plc Annual Report 2006 | 05 Chief Executive’s Report On the fifth anniversary of the listing in March 2002 of Xstrata plc on the London Stock Exchange, the Group is unrecognisable from its beginnings as a small, growth-constrained and narrowly-diversified company operating in only three commodities and three countries. Today, as one of the largest diversified mining companies, Xstrata comprises operations and projects across 19 countries, with top four industry positions in each of its major commodity markets and an extensive pipeline of value-creating growth projects. We have reached this position by relentlessly pursuing shareholder value on three fronts: I first, executing a strategy of growth and diversification whenever we identify value enhancing opportunities consistent with our metrics of value and risk; I second, a continuous programme of productivity and efficiency improvement at all operations; and I third, a consistent search for ways to enhance the net present value (NPV) of the existing asset base through resource to reserve conversion and process innovation. In summary, growth has been achieved and value created through: I the successful completion and integration of three company-transforming acquisitions; I a series of valuable bolt-on additions to our core businesses; I the on-going extension of mine lives at a number of our key assets; I the delivery of significant internal growth projects in our alloys, coal and zinc businesses; and I an industry-leading performance in containing operating costs across the Group. In 2006 alone, three major acquisitions with a combined cost of $19.6 billion – Falconbridge Limited, one-third of Cerrejón Coal and Tintaya Copper – were successfully completed, contributing to the Group’s progress and transforming the breadth, range and scale of its businesses. Three major acquisitions The acquisition in March of a one-third interest in the Cerrejón coal operation in Colombia, one of the world’s premier coal mining assets, provided Xstrata with additional exposure to high quality, premium thermal coal with access to the growing North American, South American and European markets. Cerrejón has already outperformed the assumptions made at the time of the acquisition and the mine’s exceptional resource base, the expansion currently under way and the potential for future growth – together with the recent resurgence in thermal coal prices – all give me great confidence that this transaction will secure significant additional value for our shareholders over the long-term. The acquisition of the Tintaya copper operation from BHP Billiton in June provided Xstrata Copper with an additional 120,000 tonnes of annual copper production and a significant strategic position in southern Peru. We also recognised the potential for further growth 06 | Xstrata plc Annual Report 2006 Chief Executive’s Report at Tintaya from the associated satellite deposits and I am delighted that in the eight months since acquiring the assets, the Xstrata Copper team has already confirmed resources of some 470 million tonnes at 0.7% copper at the Antapaccay deposit, just 9 kilometres from Tintaya. A drilling programme will now commence with the intention of upgrading this resource base further as part of a pre-feasibility study into the development of the project. Subsequent to the acquisition, synergies have been identified with a value of $110 million and these are being progressively realised. In addition, a further $50 million of value has already been realised through ongoing operational management initiatives, with a range of other significant initiatives being actively pursued in 2007. Finally, the most significant step of all came with the successful acquisition of Falconbridge Limited. The acquisition was launched in May and completed in October, but in truth commenced over one year earlier, with the opportunistic purchase of a 20% stake in that company. Securing this stake gave Xstrata an essential advantage in the contested acquisition, enabling us to offer the remaining Falconbridge shareholders the certainty of cash at a substantial premium, while containing the average price paid per share to gain 100% of the company. As a result of these acquisitions, Xstrata is now a one million tonne per annum copper producer with an unrivalled suite of growth options, exposure to all major copper metallurgical technologies and an excellent position in South America. The Group also maintains a significant position in the nickel market with excellent potential to grow, has gained exposure to North America and is the world’s largest zinc producer, with a profitable, integrated aluminium business. Growth in earnings The acquisitions completed in 2006 contributed $4.6 billion to Xstrata’s pro forma 2006 EBIT of $8.3 billion, demonstrating the very significant earnings accretion achieved through adding cash generative operations to the portfolio at a time of sustained high commodity prices. On a pro forma basis, stronger commodity prices contributed to an increase of over 119% in attributable profit to $4.9 billion. EBITDA (pre-exceptionals) rose to $10.4 billion, with Xstrata’s operations generating $9.4 billion of cash. In 2006, for the third consecutive year, prices for every commodity produced by the Group (with the single exception of vanadium) were higher at the end of the year than at the beginning. While average prices for coking and thermal coal were marginally lower, average prices for base metals were substantially higher than in the previous year. Base metals prices remain highly volatile, as evidenced in the first few months of 2007, but they remain significantly above long-run averages and comfortably ahead of any of the assumptions that underpinned our acquisitions in 2006. Xstrata Nickel’s Koniambo project in New Caledonia contains one of the largest undeveloped nickel orebodies in the world Xstrata plc Annual Report 2006 | 07 The high cost inflation associated with inputs into the mining industry, to which I referred in my interim report, continued to impact our operations in the second half of the year. In particular, demand for contract labour, fuel, explosives and construction materials continued to outstrip supply, resulting in increased lead times for equipment delivery and rapidly escalating prices. Mining sector inflation, together with the impact of CPI inflation, impacted EBIT at the former Xstrata operations by a total of $274 million, which is very significant. However, there is some evidence that the rate of price increases may have slowed somewhat in the second half of the year, although it is too early to see if this will continue in 2007. Value creation from the portfolio Efficiency gains The full impact of the rising prices of inputs was mitigated by a highly creditable performance in containing real costs by our commodity businesses. The operating cost base of the legacy Xstrata operations was reduced by $56 million in 2006 – a fifth consecutive year of real operating cost savings, with a particularly strong performance in the second half. These cost savings clearly demonstrate the benefit of new, lower cost production coming on stream from the range of brownfield growth projects that Xstrata has commissioned in the past two years. In particular, increased lower-cost production of thermal coal from Rolleston and longwalls in New South Wales and of coking coal from the Wollombi deposit, the commissioning of the highly efficient Lion ferrochrome smelter and increased production from the lower-cost Black Star zinc-lead open pit mine and McArthur River open test pit all contributed to this exceptional result. In addition, the outstanding cost performance of our zinc business benefited from further efficiency gains in our European smelters, with a $23 million gain from San Juan associated with improved recoveries, particularly of silver. Extensions of mine lives and resources Further extensions to mine reserves and resources have been confirmed at a number of Xstrata’s operations and exploration projects, prolonging the life of our operations and providing significant increases to the net present value of these assets. In particular, it is very pleasing that the Xstrata Copper team has been able to adapt the mine plan at Alumbrera to access additional mineralization in the bottom of the open pit, extending the life of this operation by a further year, for the third year running. Similarly, at Mount Isa, additional underground reserves of some 7 million tonnes have been established to extend the mine life by a further year. We are also progressing into pre-feasibility stage exciting possibilities to exploit lower grade underground resources at Mount Isa through bulk mining methods. Additional resource extensions have been confirmed at the Wandoan thermal coal project, the Raglan nickel mine, the Kabanga and Araguaia nickel projects, and the Las Bambas copper project. At Las Bambas, indicated and inferred resources have increased by 69% from 300 million tonnes at 1.1% copper to 508 million tonnes at a grade of 1.14% copper using a 0.5% cut-off grade. The presence of substantial volumes of high grade skarn-style copper mineralization, with notable grades of molybdenum and gold, supplemented with large, lower grade copper porphyry mineralization confirm the potential scale and quality of this mineral district. 08 | Xstrata plc Annual Report 2006 Chief Executive’s Report Nickel core samples from Kabanga exploration project, Tanzania Bulldozer on the stockpile at Bulga thermal coal mine, Australia The proximity of the substantial Mineral Resource at the Antapaccay deposit to the existing Tintaya infrastructure, indicates its significant potential both to increase production and to extend the life of Tintaya – substantially increasing the NPV of this acquisition, as well as to leverage the development of the Las Bambas mineral district, some 100 kilometres away. The acquisition of Falconbridge has dramatically extended average mine life within our copper business. Based on current production rates and proven and probable reserves, the average mine life of Xstrata’s copper assets has been extended from approximately 13 years to over 20 years, whilst further conversion of the currently known resource base would extend this beyond 30 years. Internal growth projects Xstrata now has an extensive pipeline of major growth projects across our commodity businesses that can be brought on in line to feed market demand. In 2007 our nickel business will continue to progress the Araguaia, Koniambo and Kabanga greenfield projects, while the Nickel Rim South project remains on track for first production in 2009. The Falconbridge acquisition has completely transformed the scale and range of internal growth options available to our copper business, which now holds a portfolio of five major, greenfield projects that have the potential to more than double the Group’s current one million tonnes of annual copper production. In addition to increasing the resource base at four of these projects, Xstrata Copper has taken up its 62.5% option and will assume management control of the Tampakan project from our partners Indophil Resources at the end of March 2007. Our coal business continues to benefit from a wealth of brownfield expansion projects at Cerrejón Coal, Rolleston and across our New South Wales operations, as well as greenfield opportunities such as the 7 million tonnes per annum Goedgevonden Project in South Africa, the massive Wandoan coal project in Queensland and the Glendell project in New South Wales. In Xstrata Alloys, our chrome business is already benefiting from the new low-cost production from the Lion ferrochrome operation, which has significant brownfield expansion potential. In our zinc business, expansions of the McArthur River open-cast mine (to 320,000 tonnes per annum) and the concentrator at Mount Isa are already under way, increasing annual production and lowering the cost base of these businesses. The low capital cost 60% expansion to 8 million tonnes per annum of the zinc-lead concentrator will have the additional benefit of doubling the supply of our own concentrate to our European smelters. Xstrata’s executive and business unit management have recognised the challenge of delivering this scale of growth on time and on budget in the current industry environment of high inflation and equipment and skills shortages. I am confident that our past successes, the robust risk management process and devolved accountability that underpin our business approach and the impressive project management expertise that we have gained in the Falconbridge acquisition, will all contribute to the successful realisation of our industry-leading growth options. Xstrata plc Annual Report 2006 | 09 Integration of Falconbridge and Synergy Benefits The formal integration of Falconbridge into Xstrata was completed at the end of December 2006, just four months after we gained management control in August 2006. The smooth and efficient integration of an acquisition of this magnitude and complexity bears testimony to Xstrata’s integration methodology and to the expertise of a network of integration team members drawn from across our business units, both of which have now been refined and tested on a number of large transactions. Nickel A new commodity business, Xstrata Nickel, led by Ian Pearce former COO of Falconbridge, has been established with its head office in Toronto. The inclusion of this team expands the breadth and depth of Xstrata’s technical capabilities, and provides real impetus to our strategic aim to grow the nickel business rapidly. One of the new team’s pressing objectives is to work closely with CVRD Inco to optimise efficiencies across the operations of both companies in the Sudbury basin. Tremendous potential exists to unlock value, extend the lives of the Sudbury operations and to bring on additional growth through this process. Teams from Xstrata Nickel and CVRD Inco are now actively engaged in negotiating a commercial structure to deliver these benefits. I expect that we will be able to confirm later this year how we intend to work together and, in the process, the extent of the synergy value that each company will create for its shareholders. I am confident that our revised estimate of Xstrata’s share of Sudbury synergies of $120 million per annum (previously $80 million) remains conservative. Copper Falconbridge’s copper assets have been fully integrated into Xstrata Copper. The resulting portfolio of copper operations and growth projects is arguably the most exciting and prospective in the sector. Xstrata Copper has been structured into five operating divisions across Argentina, Canada, North Chile, Southern Peru and North Queensland, designed to maximise the potential of the regions in which they operate. Xstrata Copper has identified approximately $60 million of annual operating synergy benefits arising from the integration of the former Falconbridge copper assets. The progressive implementation of integration plans will see these benefits fully realised during 2007. In addition, a once-off finance re-structuring benefit of $58 million was achieved as a result of the copper asset integration. Zinc Similarly, Xstrata Zinc has absorbed the Falconbridge zinc assets, creating a new operating division, Xstrata Zinc Canada, and further improving Xstrata’s integration across zinc concentrate mining and smelting. The combination of Falconbridge’s zinc business with Xstrata’s existing assets has propelled Xstrata to become the world’s largest zinc producer and annual synergies of $11 million have been identified through the integration process. Aluminium The Falconbridge acquisition also provided entry to aluminium, another new commodity. Xstrata Aluminum is an integrated aluminium producer, predominantly based in the US and active across the entire value chain from bauxite through to downstream products. As signalled at the time of the acquisition, we are conducting a strategic review of this business, to assess its potential as a platform for future growth in this new commodity, compared to the prospects for a profitable sale, and I expect a final decision to be made during the first half of this year. Technology and research The world-class former Falconbridge technology and research activities have been consolidated into a single activity as Xstrata Process Services, to provide mineral processing expertise and support to all of Xstrata’s businesses worldwide. Falconbridge’s commercial processing technologies, including the widely-used Kidd Process for copper refining, have been absorbed into Xstrata Technology, which specialises in marketing world-class processing technologies to clients worldwide. Exploration Falconbridge’s exploration function has been restructured in line with Xstrata’s approach to exploration. We continue to believe that greenfield exploration is best achieved through partnerships with juniors, who are better equipped to identify new resources successfully, 10 | Xstrata plc Annual Report 2006 Chief Executive’s Report and from within business units where existing assets can be leveraged to maximise the returns from exploration. This restructuring has resulted in the devolution of exploration activities to the relevant business units, a rationalisation of non-essential activities, reduction in headcount and an ongoing programme of exiting non-core exploration properties and tenements, often retaining an option to participate in the most promising. To date, the total consideration value of these divestments is just over $60 million, whilst the divestment of equity investments yielded $7 million. Corporate and head office costs In keeping with our entrepreneurial management structure, authority and responsibility has been devolved wherever possible to the copper, zinc, nickel and aluminium business units. This has resulted in headcount reductions and downsizing of corporate facilities. One-off costs associated with the integration totalled $50 million and comprise primarily redundancy and facilities closure costs – more than offset by the one-off $67 million proceeds from exploration disposals discussed above. Resulting from the successful integration process, I am pleased to report that our estimate of head office and exploration synergies has increased by 88% to $75 million per annum. Annual synergy gains As a consequence of these successful steps, the original estimate of synergies in our investment case for the acquisition of Falconbridge has been significantly surpassed. At the time of the transaction, we estimated around $120 million of annual cost savings ($40 million associated with the head office costs at Falconbridge and $80 million in potential synergy gains in the Sudbury basin). Our estimate of operational synergy benefits (including the revised $120 million estimate of attributable Sudbury synergies already highlighted) has risen to some $265 million per annum. In addition to these annual pre-tax cost savings, a further $280 million of annual synergies are expected to result from the inclusion of the former Falconbridge assets within our financial structure from 2007. As a consequence, the acquisitions of Falconbridge and Tintaya have secured over $4 billion of sustainable value creation for shareholders. I am proud of our team who, once more, have executed the integration in an exemplary fashion, reinforcing my view that post-acquisition integration is one of Xstrata’s distinctive capabilities. Through the Falconbridge acquisition, we have gained an outstanding pipeline of organic growth projects, an entry into nickel and aluminium, geographic diversification into North America and exceptional people with the talent and skills to help Xstrata continue to grow and unlock value from our portfolio. I also commend the professionalism with which the former Falconbridge employees participated in the integration, a factor which contributed substantially to its success. Compliance with the South African Mining Charter During the course of the year, Xstrata plc concluded a ZAR2.4 billion ($387 million) agreement with African Rainbow Minerals Limited Xstrata plc Annual Report 2006 | 11 (“ARM”), which established a new majority black-owned company, ARM Coal, and introduced meaningful and sustainable black economic participation in Xstrata’s South African coal business. The newly established ARM Coal (51% owned by ARM and 49% by Xstrata) owns a 20% participation share in Xstrata’s existing South African coal business. ARM subsequently took up a further direct 10% stake, at a cost of ZAR400 million, which, together with ARM’s 51% share of the Goedgevonden project, resulted in 36% of Xstrata’s South African coal business being owned by historically disadvantaged South Africans. ARM Coal provides both Xstrata and ARM with an alliance through which existing and future growth opportunities in Africa can be pursued. In addition, in February 2007, Xstrata Alloys concluded a ZAR575 million agreement with the Bakwena Ba Mogopa community in respect of Xstrata’s fully integrated Rhovan vanadium facility in South Africa. The Community is the surface owner of the property on which the facility is located. Through the transaction, the Community will have an effective 26% participation in the Xstrata Alloys vanadium business through a Pooling and Sharing Venture, similar to the Xstrata-Merafe Chrome Venture. As a result, all of our South African businesses have now met the ownership provisions of the Mineral and Petroleum Resources Development Act of 2002 (“MPRDA”) and Xstrata is the first major international mining company to have been acknowledged by the Department of Minerals and Energy as being in full compliance with the Act and the Mining Charter. Balance sheet, dividend, capital management Xstrata spent a total of $19.6 billion and assumed debt of $3.8 billion to fund acquisitions in 2006. Despite this significant outlay of cash, the Group has maintained its investment grade credit rating, through successful equity issues to raise a total of $8 billion and an over-subscribed $2.25 billion debut US bond offering. These capital raisings, together with continued very strong cash generation from Xstrata’s operations, have enabled the repayment in full of both equity and debt bridge facilities associated with the acquisition representing a total of $9.5 billion. This, together with the exceptional cash generation of its assets, position Xstrata to fund capital expenditure in 2007, while still rapidly repaying corporate debt. While gearing The Skills Training Centre at the Lion Ferrochrome smelter is providing training to local community members 12 | Xstrata plc Annual Report 2006 Chief Executive’s Report A small-scale chicken farm is one of several community enterprise development initiatives supported by St Ann bauxite mine, Jamaica The operations control room at the Horne smelter, Canada of 41% at year end is currently above our target range, further bank debt has been paid down in early 2007 and gearing is expected to decline significantly in the current year. With no material debt falling due within the next 18 months and an excellent spread of maturities within the Group’s bond and bank debt facilities, Xstrata is well positioned to fund its capital expenditure in the current year, currently expected to be around $2.4 billion. Additional initiatives to diversify funding and expand the debt portfolio maturity further may be considered opportunistically during the current year. The acquisition of 20% of Falconbridge for $28 per share in August 2005 gave Xstrata an important strategic advantage in the acquisition of Falconbridge. The fact that we had acquired 20% of the company at this price allowed us the flexibility to compete for the remainder of the equity and, as a result, the average purchase price of C$56.44 per share was comfortably within our valuation range. However, under International Financial Reporting Standards (IFRS), goodwill is calculated separately for each acquisition stage, regardless of the average price paid per share to acquire the entire interest. This creates an obvious gap between the average price per share actually paid by Xstrata for the 100% interest and the price paid for the remaining 80% equity (C$62.50 per share), resulting in the creation of additional goodwill of some $1.5 billion. In view of the above, the usual impairment tests unsurprisingly result in an impairment charge of $1,378 million in the statutory income statement. The proposed final dividend of 30¢ represents an increase of 34% compared to the previous year, and has been rebased at this higher level to reflect the cash generated by the enlarged Xstrata, together with our continued confidence in the outlook for the current year and beyond. Pleasingly, the rapid earnings growth and transformation achieved by Xstrata has translated into record value creation for shareholders. In 2006, Xstrata delivered a total annual shareholder return of 112%, far outstripping its industry peers. One pound invested in Xstrata at the time of our initial public offering in 2002, would have increased in value by some 430% to nearly £5.30 at the end of 2006, demonstrating the significant wealth Xstrata has created for its shareholders over the last five years. Value creation remains the core tenet of our activities and the measure by which all of our growth initiatives are judged. Xstrata plc Annual Report 2006 | 13 Outlook Commodity prices have again performed very strongly in 2006. While it is unlikely that average prices for base metals will continue to rise at a similar rate in 2007, the fundamental outlook for the industry remains positive. The rapidly industrialising economies of China and India and the satisfactorily performing economies of the older ‘Asian tigers’ and Europe will continue to drive demand growth for metals and energy, despite an underperforming US economy. On the supply side, the tight availability of major projects, skilled resources and cheap power and the challenges of difficult geographies, inadequate infrastructure, significant cost inflation and the depleting nature of reserves across the industry will continue to moderate growth in production. As a consequence, there is no sign that commodity prices are rapidly returning to long-run averages, and the price environment remains very favourable, particularly in our traded thermal coal and ferrochrome businesses, where contract prices have been negotiated above last year’s levels. We therefore move into the next stage of Xstrata’s development, delivering the benefits of our recent acquisitions and the immense growth optionality inherent within the portfolio, with a following wind. This positive outlook often appears to need reiteration in the face of the increased volatility that is now such a feature of the equity and commodity markets. This challenging environment also creates opportunities for those companies that are well positioned and that have the global intelligence, management momentum and shareholder support that enable them to capitalise from the two major trends that continue to characterise our industry: a robust price environment and on-going consolidation. Critical to any such success is also one’s confidence in the price assumptions that underpin valuations – particularly the short-term price assumptions at times of exceptionally high prices. For this reason, Xstrata is engaged in a continual review of its short- and long-run commodity price assumptions. Xstrata is well positioned to maintain its track record of success based on: I a focused and consistent strategy of delivering growth as well as NPV enhancement; I a clear view on how focusing on the price of assets and how to operate them in the most effective way – not just some elusive search for “quality” – creates real value; I a culture that is not comfortable with standing still; and I a devolved management structure that builds a sense of empowered ownership across our teams. It is therefore to the men and women in Xstrata to whom I first address my thanks. Xstrata’s success over the past five years has been delivered by your dedication, your commitment to safety and to the values that underpin our Mission Statement, and your hard work. We will continue to build on our success to date in creating a positive, safe work environment and the mutually beneficial partnerships with our stakeholders that are an essential element of future success. Xstrata has a small but talented team at the centre. They are due much credit for the role which they have played since our IPO in 2002. I also thank my fellow directors and my executive colleagues for their courage, support and wisdom. The willingness of the non-executive directors to back this management has allowed Xstrata to emerge as a major force in the mining and metals industry. 2007 has launched itself with volatility and debate. I am, however, steadfast in my belief that Xstrata’s drive for growth and value creation can be realised by a management who are alive to the opportunities and who can manage the challenges. M L Davis 14 | Xstrata plc Annual Report 2006 Cautionary note regarding forward looking statements This Annual Report includes statements that are, or may be deemed to be, “forward-looking statements”. We may also make written and/oral forward-looking statements in: I I I our interim reports, our summary financial statements to shareholders, our offering circulars and our prospectuses; our press releases and other written materials; and oral statements made by our officers, Directors or employees to third parties, including to financial analysts. These forward-looking statements can be identified by the use of forward-looking terminology, including the words “believes”, “estimates”, “anticipates”, “expects”, “intends”, “plans”, “goal”, “target”, “aim”, “may”, “will”, “would”, “could” or “should” or, in each case, their negative or other variations or comparable terminology and include all matters that are not historical facts. They appear in a number of places throughout this Annual Report and include statements regarding our intentions, beliefs or current expectations and those of our officers, Directors and employees concerning, amongst other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and dividend policy and the industries in which we operate. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and may be beyond our ability to control or predict. Forward-looking statements are not guarantees of future performance. Our actual results of operations, financial condition, liquidity, dividend policy and the development of the industries in which we operate may differ materially from the impression created by the forward looking statements contained in this Annual Report. Important factors that could cause these differences include, but are not limited to, general economic and business conditions, commodity price volatility, industry trends, competition, changes in government and other regulation, including in relation to the environment, health and safety and taxation, labour relations and work stoppages, changes in political and economic stability, currency fluctuations, our ability to integrate new businesses and recover our reserves or develop new reserves and changes in business strategy or development plans and other risks, including those described in the “Business Overview and Strategy” section of this Annual Report. Even if the results of operations, financial condition, liquidity and dividend policy and the development of the industries in which we operate are consistent with the forward looking statements contained in this Annual Report, those results or developments may not be indicative of our results or developments in subsequent periods. Forward-looking statements speak only as of the date they are made. Other than in accordance with our legal or regulatory obligations (including under the Listing Rules and the Disclosure and Transparency Rules), we do not undertake any obligation to update or revise publicly any forward looking statement, whether as a result of new information, future events or otherwise. The Directors’ Report in this Annual Report has been prepared for the members of the Company and its purpose is to assist shareholders to assess the Company’s strategies and the potential for those strategies to succeed and for no other purpose. The Company, its directors, employees, agents and advisers do not accept or assume responsibility for any other purpose or to any other person to whom this Annual Report is shown or into whose access it may come and any such responsibility or liability is expressly disclaimed. Business Overview & Strategy Momentum Creating Value 16 | Xstrata plc Annual Report 2006 Business Overview & Strategy Strategy Xstrata’s strategic objectives are: Xstrata’s primary strategic aim is to create superior shareholder value by growing and managing a diversified portfolio of mining and metals businesses. Our Mission recognises that, to continue to grow and create value over the long term, we must operate in an ethical and transparent way, through mutually beneficial partnerships with our stakeholders. Our Statement of Business Principles sets out the ethical framework for our activities. To manage an attractive portfolio of assets diversified by commodity, geography and currency When we enter new commodity markets, we generally seek to gain a significant market position and currently maintain top four industry positions in each of our principal commodity markets. In some instances we establish a foothold into a new sector from which we seek to grow a meaningful position – such as the newly acquired nickel operations. A diversified portfolio balances the risks associated with specific commodity price cycles and operating locations, providing investors with more reliable and stable cash flows. Diversification also engenders healthy competition for capital between Xstrata’s commodity businesses, ensuring only the most attractive projects or acquisitions are approved and allocated capital. Today, Xstrata benefits from a very significant growth pipeline across a number of commodities, allowing the strategic sequencing of projects and deployment of capital to achieve growth while maximising value creation, in line with projected market conditions. Following the acquisition of Falconbridge, we have gained exposure to nickel, a new commodity for Xstrata, a smaller aluminium business and entry into North America, diversifying further the Group’s commodity, currency and geographic exposure. The portfolio of commodities produced includes both exchange-traded commodities such as copper, nickel, zinc, aluminium and lead, and commodities sold through negotiated customer-supplier contracts, such as ferrochrome, thermal coal and coking coal. The balance of In the five years since Xstrata plc was created through an initial public offering on the London Stock Exchange in 2002, the scale, scope, geographic spread and commodity diversification of the Group has been transformed through a combination of incremental acquisitions, organic growth projects, operational improvements and, most profoundly, through value accretive, companytransforming acquisitions. As a result of the acquisitions in 2006, the enlarged Xstrata is now the fifth largest public mining company in the world, with a meaningful position in seven major commodity markets and operations and projects in 19 countries. Growth through a combination of bolt-on and company-transforming acquisitions remains core to Xstrata’s strategy. In addition, Xstrata benefits from an exceptionally strong suite of organic growth projects, from which significant volume growth and superior returns can be achieved, as market conditions allow. Company-transforming acquisitions March 2002: $2.5 billion acquisition of Enex and Duiker coal assets and London IPO June 2003: $2.95 billion acquisition of MIM Holdings Ltd, Australian coal, copper, zinc mining company August 2006: $18.8 billion acquisition of Falconbridge Limited, Canadian copper, nickel, zinc, aluminium mining group Xstrata plc Annual Report 2006 | 17 Xstrata’s earnings has also changed as a result of these acquisitions. Over 50% of EBIT in 2006 (on a pro forma basis) was generated by Xstrata Copper alone. While increased exposure to any one commodity is an inevitable consequence of rapid acquisition-led growth (and very strong base metals prices in 2006), we expect the balance of our earnings growth to diversify further in time, either through growth from other commodity businesses, or through diversification into new commodities. We believe that greenfield exploration in new territories is most efficiently and successfully undertaken by junior mining companies. Xstrata is pursuing a successful strategy of partnering with junior exploration companies, allowing us to leverage each partner’s strengths for mutual benefit. In addition to existing partnerships, an extensive portfolio of exploration projects was acquired from Falconbridge, which is being simplified through disposals of some projects and the retention of options to invest or direct interests in others. In 2006, Xstrata launched its inaugural US bond offering, and successfully completed two equity raisings, protecting our investment grade credit rating and enhancing our financial flexibility and debt maturity profile. In addition to our focus on growth, we maintain a progressive dividend policy, in line with Xstrata’s profitability, and make appropriate returns of capital to shareholders, where cash generated exceeds our requirements for investment or further growth opportunities. To uphold a rigorous and unwavering focus on value and growth, identifying and securing opportunities for value creation Our imperative to grow the business is underpinned by an unwavering focus on value creation that applies equally to growth initiatives and operational improvements from our portfolio as it does to the acquisitions of projects or other assets. Our strategy recognises that opportunities for value creation are not limited to the pursuit of quality and we have demonstrated that enhanced operational management, judicious capital investment, and the proper identification and management of risk can create significant value. We continue to pursue an acquisition-led strategy; however, following the acquisitions made in 2006, Xstrata’s range of brownfield and greenfield organic growth projects has been significantly expanded across its commodity businesses. Any future funding decisions will continue to be based, as those to date have been, on a dispassionate view of each project’s potential to create value in its own right on a net present value basis, using conservative long-run commodity prices. To maintain and enhance our financial strength and discipline We are committed to maintaining a robust balance sheet and investment grade credit rating, ensuring access to a diverse range of funding sources. Xstrata’s efficient financial structure, our focus on disciplined capital expenditure, strong cash management and cost control enable us to fund ongoing capital requirements, as well as pursuing rational organic and acquisition-led growth opportunities. Operators Les Dasley and Norman Finch skimming lead slabs at Northfleet refinery, UK 18 | Xstrata plc Annual Report 2006 Business Overview & Strategy To create further value through ongoing portfolio optimisation, delivery of capital and operational efficiencies and real cost reductions In 2006, Xstrata completed three major acquisitions, including the identification of over $545 million in annual synergies, and commissioned five new operations, bringing on lower-cost production on time and on budget. Sustainable cost reduction is an important driver of value creation and a measure of the quality of our operational management and our stewardship of the assets of our owners. In each of the last five years, Xstrata has achieved real cost savings from its operational cost base and has outperformed its FTSE100 mining industry peers. In 2006, $56 million of real cost savings were achieved in a very challenging environment. Xstrata’s commodity businesses are responsible for undertaking ‘near-mine’ exploration around existing operations or in nearby regions, leveraging existing assets, and conducting targeted greenfield exploration at known deposits with the objective of adding to the Group’s resource base. We believe that this exploration is an integral part of our commodity businesses and as such, do not maintain a central or standalone exploration function. In 2006, this strategy resulted in increased resources and/or extensions to mine lives at nine separate projects and operations. To achieve and maintain the highest standards of health, safety and environmental performance at our operations, and to work in partnership with local communities for mutual benefits, supporting the principles of sustainable development We aim to operate a fatality, injury and illness-free business and believe that all work-related incidents, illnesses and injuries are preventable. Safety is an ongoing, major focus for the Group, as we strive to eliminate fatal and high potential risk incidents from every aspect of our operations. We have made significant investments in safety leadership, behavioural training and technological solutions to safety challenges in recent years and continue to prioritise safety as our primary operational consideration. We seek to drive sustainable improvements in efficiency across the Group, in particular in the use of natural resources and energy. We aim to minimise the environmental impact of our operations, conserve biodiversity and operate to the highest international environmental standards. Every managed operation develops an annual social involvement plan in close co-operation with local communities and other relevant stakeholders, including government, NGOs and unions. We set aside a minimum of 1% of Group profit before tax to invest in community initiatives that deliver long-term benefits, with the ultimate aim of leaving behind stronger, sustainable communities once the mine is depleted and operations cease. In 2006, the amount set aside for corporate social involvement was in excess of $49 million. Further details are provided in the Sustainable Development section on pages 96 to 100. To foster a high performance and entrepreneurial culture through a highly devolved structure, empowering management teams and minimising overhead Xstrata differentiates itself from its industry peers by devolving maximum responsibility and authority to its commodity business units. We believe this directly benefits our operations by creating a strong sense of local ownership, where entrepreneurial managers are empowered and incentivised to address site-specific challenges and seize opportunities. Each commodity business is fully resourced to function as an independent business and is accountable for all aspects of its operations from exploration to post-closure remediation, within defined authority levels and within the Group’s governance framework. Xstrata’s commodity businesses are supported by a small corporate centre, split between the head office in Zug, Switzerland and the registered office in London, United Kingdom. In total, the corporate centre comprises around 40 people. The role of the corporate centre is well defined, minimising the burden of overhead. We aim to attract and retain the best people at every level of our businesses and to provide them with the resources they require to achieve and maintain our operational excellence. We provide industry-leading career development opportunities, competitive remuneration and fair and non-discriminatory workplaces. We believe our devolved management structure and supportive environment for rational risk-taking offers unparalleled opportunities for development and entrepreneurial Xstrata plc Annual Report 2006 | 19 James Beams and Jim Young at Xstrata Coal’s Oaky Creek mine, Australia leadership, minimising bureaucracy and allowing every employee to play an active part in our success. As set out in further detail in the remuneration report on pages 126 to 139 of this report, remuneration for executive and senior management across our businesses is closely aligned with Xstrata’s strategy to grow and create long-term shareholder value in a sustainable manner. A high proportion of total remuneration is “at risk” and performance-related, incorporating financial and non-financial performance measures. These performance measures are determined on an individual basis and include absolute performance (e.g. return on capital employed), relative performance (e.g. performance in comparison to peers) and non-financial performance measures (e.g. safety performance), in line with international best practice. To conduct our business activities ethically and with the maximum transparency commercially possible A key role of the corporate centre is to ensure effective governance of our businesses, through open and regular communication, by setting the Group governance framework in which our activities take place and by measuring performance against these principles, policies and standards. Xstrata is governed by a robust Board comprising eight non-executive directors and three executive directors. The Group Executive Committee determines and executes Group strategy and comprises the commodity business Chief Executives, together with the Group Chief Executive, Chief Financial Officer and Executive General Manager, Corporate Affairs. Xstrata’s adherence to the principles and provisions of the UK Combined Code on Corporate Governance is set out in the corporate governance report, together with an explanation of key governance policies and procedures. We prefer to own a significant stake in our operations and joint ventures and take management control of operations wherever possible. As a result of the acquisitions in 2006, Xstrata now also has an interest in several non-managed operations including Cerrejón coal, Collahuasi copper, Antamina copper-zinc, as well as the Douglas-Tavistock thermal coal joint venture. We take an active role as shareholders in these operations, through steering committees and other governance structures, to ensure that joint venture management teams align themselves with Xstrata’s global standards and business principles and to protect our shareholders’ interests. 20 | Xstrata plc Annual Report 2006 Business Overview & Strategy | Commodity Business Strategies Xstrata Alloys Eliminate fatalities and achieve a step-change in safety performance through visible leadership, intensive training and knowledge-sharing Maintain our market leadership position in ferrochrome by leveraging our unique scale, position in South Africa, access to raw materials and expertise across a wide range of technologies Enhance our competitive cost position, particularly through our Premus Technology and initiatives to minimise dependency on high-cost inputs, such as coke, logistics and power Use our capabilities and technologies to build a diversified production base and pursue growth into other ferro-alloys or related industries to increase critical mass Continue to position Xstrata Alloys as the preferred supplier to the most attractive global customers Continue the progress made in the Xstrata-Merafe Chrome, Bakwena Vanadium and Kagiso Platinum ventures towards full compliance with the spirit of the SA Mining Charter Position the vanadium division to benefit from price spikes, ensure resilience in downturns and leverage the technical flexibility of Rhovan to develop high-value vanadium alloy products for specific international markets Xstrata Aluminum Build on our success to date in improving safety performance at every operation Achieve incremental growth throughout the integrated production chain, with a specific focus on identified brownfield expansion opportunities at St Ann, Gramercy, New Madrid, Huntingdon and Salisbury Improve the cost position of our operations through ongoing energy efficiency and other initiatives Leverage our operational excellence to maximise returns on invested capital, through mine optimisation and ongoing capital efficiencies Create value by leveraging our leadership position in rolled products, maximising both volumes and margins Xstrata Coal Create a fatality and serious injury free workplace which operates beyond compliance of our Health Safety Environment and Community (HSEC) obligations Continue to commit financially to the development, testing and implementation of clean coal and low emission technologies Maintain our position as the leading exporter of coal, expanding our business by continuing to pursue value-adding external growth opportunities Generate and develop incremental growth options to deliver high return growth from the existing portfolio Ensure we are well positioned to capture the opportunities presented by the growing US market by the timely expansion of our Colombian investments Create value for ourselves and our customers and be recognised for consistent, reliable supply across all markets Maximise returns on invested capital through operational excellence, mine optimisation and capital efficiency Maintain a high performance team and be the employer of choice in the sector Xstrata Copper Consolidate and build on the dramatic improvements in safety performances across the businesses with the strategic objective of achieving injury-free, safe work environments Effectively implement environmental management systems and practices that will demonstrate industry leadership in environmental performance Maximise the net present value of existing operations through ongoing capital and operating efficiencies, ongoing grade profile optimisation and extensions to mine lives Create and consolidate regional leverage through effective exploration, project development and business joint ventures in regions where Xstrata Copper already has an operating presence and/or infrastructure Capitalise on Xstrata Copper’s industry-leading greenfield project pipeline by advancing activities and decision points on these development projects Implement disciplined cost management programmes to ensure cost competitiveness throughout the commodity cycles Attract and retain quality people and, through the implementation of a comprehensive human resources strategy, realise the full potential of our people Develop and retain a strong reputation for social responsibility in the broader community Xstrata plc Annual Report 2006 | 21 Xstrata Nickel Maintain an uncompromising focus on health, safety, the environment, and socially responsible practices Build and sustain mutually beneficial relationships with our fellow employees, communities, governments and other stakeholders Promote an entrepreneurial environment where all employees are accountable for their actions and empowered to identify and pursue the creation of value Continually grow and improve the quality and value of existing assets and leverage the technological excellence of our operations, our industry-leading exploration capabilities and project management skills Actively pursue external and organic growth initiatives, including the development of Xstrata Nickel’s attractive portfolio of projects into world-class assets Xstrata Zinc Continue efforts in further improving our high standards in health, safety, environment and community relations Continue driving Xstrata Zinc’s strategy through our strengths in: I Xstrata Technology Continually improve Xstrata's select portfolio of innovative processing technologies Market these technologies globally to improve the efficiency and environmental performance of the minerals processing industry Work with both internal and external users to develop and interchange efficiency improvements for the benefit of all users Invest in research to develop new technologies and new applications for existing technologies Focusing on cost control at all operations Leveraging technology and management skills to improve existing operations, achieving world-class efficiency Transforming acquired operations through cost cutting, efficiency and productivity improvements Developing internal growth projects with moderate capital cost and high returns I I I Leverage improved operational, capital and safety performance by exchange of best practice and knowledge across our global zinc business Improve our vertical integration further by exploiting the significant growth potential inherent in the long-life resources of our Australian operations and opportunities in Canada, complementing this through opportunistic value-enhancing acquisitions Develop opportunities to use Xstrata’s Albion process technology to develop a low cost zinc production from the extensive MRM resource 22 | Xstrata plc Annual Report 2006 Business Overview & Strategy | Principal Risks and Uncertainties The risks set out below represent some of the principal uncertainties and trends which exist in Xstrata’s business and which may have an impact on our ability to execute our strategy effectively in future. Xstrata’s risk management policy is available from our website. The following risk information is not intended to be a comprehensive overview of risks inherent in Xstrata’s business. Commodity prices Xstrata’s revenue and earnings are dependent on prevailing prices for the commodities we produce. Commodity prices are determined by the supply of and demand for raw materials, and are closely linked to global economic growth. North America, Asia and Europe are particularly important markets for Xstrata, accounting for almost 90% of 2006 revenues on a statutory basis. Xstrata produces and sells both exchange-traded commodities and commodities where prices are negotiated on longer-term contracts. Commodity prices for all products, and particularly for exchangetraded commodities, may fluctuate widely and may have a material impact on financial results. The impact on Group earnings (EBIT) of movements in the price of each of Xstrata’s commodities is set out in the EBIT Sensitivities table in the Financial Review. Commentary on the trends in each of Xstrata’s commodity markets is provided in the Markets section of this report. We manage the risk of commodity price fluctuations through maintaining a diversified portfolio of commodities and typically do not implement large-scale strategic hedging or price management initiatives. We also aim to reduce costs on a continuous basis and maintain low-cost, efficient operations, optimising our portfolio and returns throughout the commodity price cycle. operating costs are spread across several different countries and currencies. Fluctuations in exchange rates, in particular, movements in the Australian dollar, Canadian dollar and South African Rand against the US dollar, may have a material impact on Xstrata’s financial results. The impacts of currency exchange rate fluctuations on Group EBIT, together with average exchange rates, are set out in the Financial Review. We manage this risk through maintaining a diversified portfolio of assets across several different currencies. From time to time we may also hedge a portion of our currency exposures and requirement, to try to limit any adverse effect of exchange rate fluctuations. Foreign currency hedging information is provided in the Financial Review. Concentrator Technicians, Colin Jensen and Vic Kandiah, between shifts at Ernest Henry copper mine, Australia Integration of acquisitions Xstrata has grown primarily through the successful completion of a number of large-scale and smaller acquisitions and through the subsequent improvements made in the performance of businesses acquired. Acquisitions and investments in joint ventures will continue to be an important part of our strategy and involve a number of risks, including the risk that businesses acquired are not integrated effectively or that anticipated cost savings or synergies are not realised. Over the past five years, we have developed significant capability and a strong track record in effectively integrating large-scale and smaller acquisitions and investments into Xstrata’s corporate structure. In each case, acquisitions have been quickly and effectively integrated, realising operational, financial and strategic improvements and greater than expected cost savings or synergy benefits. Currency exchange rates Xstrata’s products are generally sold in US dollars, while our operations and Xstrata plc Annual Report 2006 | 23 Project development Continued robust demand for mining products has resulted in significant inflation in the cost of labour, fuel, raw materials and other key mining industry inputs, together with increased lead order times for key items and equipment. As a result, the delivery of major projects on time and within budget is increasingly challenging. Through the acquisitions made in 2006, Xstrata has a significantly enhanced pipeline of growth projects across a number of countries. Xstrata’s commodity businesses have an excellent track record of delivering major capital growth projects on time and on budget, including the successful commissioning of five major growth projects in 2006 in a very challenging cost environment. In addition, Xstrata’s existing capabilities have been complemented and broadened through the retention of a significant pool of project management expertise from the former Falconbridge business. Cost control remains a key consideration for any project development. Health, safety and environment Xstrata’s operations are subject to extensive health, safety and environmental regulations and legislation, community expectations and to the best practice standards set out in our Sustainable Development framework of policies and standards. Our commitment to the principles of sustainable development, which incorporates environmental, economic and social performance, is an integral part of our operating philosophy. New or amended environmental, health and safety legislation or regulations may result in increased operating costs or, in the event of non-compliance, the possibility of fines, penalties or other actions which may adversely affect Xstrata’s financial position. Rehabilitation costs, which are generally estimated and provided for over the life of operations and based on the best information available, may subsequently increase, impacting on Group earnings. Any breach of regulations or non-compliance with Xstrata’s own best practice standards in health, safety and environmental performance and community relations may damage our reputation and, as a result, our licence to operate. The most significant health risk facing the Group is the impact of HIV and AIDS on Xstrata’s South African workforce. We have implemented a comprehensive voluntary testing, counselling and treatment programme across our SA operations. Further information is provided in the Sustainable Development section on page 96 to 100. Every managed operation is independently audited through the Xstrata HSEC Assurance Audits on a regular basis, to provide assurance to the Board that our Progressive rehabilitation taking place at Newlands coal mine, Australia 24 | Xstrata plc Annual Report 2006 Business Overview & Strategy Operator Pat Kopittke at the anode scrap machine control panel, Townsville copper refinery, Australia Climate change and energy Xstrata operates in a number of jurisdictions in which regulations or laws have been introduced to limit or reduce greenhouse gas emissions. While it is impossible to quantify the impact of the Kyoto Protocol and related legislation and regulation at this time, the likely effect will be to increase costs for fossil fuels, electricity and transportation, restrict industrial emissions, impose added costs for emissions in excess of permitted levels and increase costs for monitoring, reporting and accounting. A number of Xstrata’s operations are intensive users of natural gas, electricity, oil and other energy sources. Significant increases in energy costs or restricted supplies of energy sources due to climate change legislation or other reasons may have a material adverse impact on the Group’s ability to maintain production and/or contain operating costs. A significant proportion of the Group’s costs relate to energy consumption and programmes are in place across Xstrata’s operations to reduce energy intensity and achieve cost savings. As the world’s largest producer of export thermal coal, Xstrata is playing a leading role in actively investing in research and development projects to reduce greenhouse gas emissions from the use of coal in power generation, together with other coal producers, governments, scientific and academic organisations. Demand for coal is expected to be supported by forecast significant increases in global demand for energy, particularly in developing countries, and by coal’s relative cost position, availability and security of supply. However, any material decline in the use of coal as a power source as a result of carbon taxes, emissions trading or similar legislation may have a material adverse impact on Xstrata’s financial position. Political and community Xstrata operates in a wide range of countries, including in some countries that may be considered to be, or may become politically or socially destabilised. Political risks include changes in laws, taxes or royalties, expropriation of assets, currency restrictions or renegotiation of or changes to mining leases and permits. Similarly, communities in certain regions may oppose mining activities for various reasons. Any of these factors could have an adverse impact on the Group’s profitability in a certain geographic region or at certain operations. We perform a thorough risk assessment on a country-by-country basis when considering our activities and investments and regularly review country risk to ensure that political, regulatory and social risks have been properly identified and are within acceptable levels. We aim to work closely in partnership with local communities for mutual benefits, earning and maintaining a social licence to operate. We further manage this risk through maintaining a broad geographic spread Group HSEC standards are being met or exceeded. Within 100 days of acquiring Falconbridge, rapid assessments had been completed of every Falconbridge site, identifying areas of underperformance and where additional investment is required. A key priority for 2007 will be to implement systems and improve the performance of the former Falconbridge operations to a satisfactory level. The acquisition of Falconbridge substantially increased the number of closed sites being managed by Xstrata. Through the integration process, the management of closed sites was reviewed and these sites are now the responsibility of the respective commodity business management teams, encouraging a more integrated approach to rehabilitation and closure planning and management. Xstrata plc Annual Report 2006 | 25 of assets, ensuring that political risk is spread across a number of territories. In South Africa, the Mineral and Petroleum Resources Development Act (MPRDA) and Empowerment Charter sets out the requirement for all existing prospecting and mining rights to be converted into “new order” rights. To achieve this conversion, or to obtain “new order” rights for new applications, mining companies must satisfy a number of criteria. These include the requirement for 26% of South African mining assets to be controlled by historically disadvantaged South Africans by 2014, and other requirements which aim to achieve broad-based black economic empowerment in the industry and more general social upliftment of previously disadvantaged persons. If mining companies cannot fulfil these criteria or provide satisfactory undertakings, existing rights may become invalid, potentially having a material adverse impact on operations in South Africa. To date, Xstrata is the only major mining company to have satisfied our ownership requirements under the MPRDA. Our South African businesses have entered into partnerships with African Rainbow Minerals (ARM), the Bakwena Ba Mogopa Community, Kagiso Trust Investments and Merafe Resources to facilitate ownership and management participation in our operations. Good progress has also been made in a number of other areas, including in increasing the proportion of procurement from black economic companies, helping to establish small and medium black-controlled companies and increasing the proportion of black and female managers within the business. Operational risks and reserves and resources Xstrata’s operations may be impacted by a number of circumstances including natural disasters, unexpected geological or technical difficulties, labour disruptions, environmental or safety incidents, causing increased costs, lower production or the suspension of operations. Exploration initiatives and the acquisition of new resources may not succeed and existing reserves may not be replaced or increased. Reserves and resources information also relies on a number of estimates and assumptions which, if materially inaccurate, could impact on our financial position and asset values. Our strategy of “near-mine” exploration and partnering with juniors has resulted in a number of resource extensions in 2006. Operational risks are identified and managed through Xsrata’s comprehensive risk management programme. Demanufacturing of a cathode ray tube in a recycling facility 26 | Xstrata plc Annual Report 2006 Business Overview & Strategy | Key Performance Indicators Xstrata’s Executive Committee and Board monitor a range of financial and non-financial key performance indicators, reported on a monthly or quarterly basis, to measure performance over time. Earnings per share* Earnings per share show attributable profit earned per share to provide a basis for comparison between different companies. Xstrata’s growth in earnings per share is shown compared to the average for BHP Billiton, Anglo American and Rio Tinto (FTSE Diversifieds). EBITDA* Xstrata’s earnings before interest, tax, depreciation and amortisation (EBITDA) before exceptional items are shown compared to the average for the FTSE Diversified miners. This provides an indication of the rate of earnings growth achieved. EBITDA* Margin The EBITDA margin shows earnings before interest, tax, depreciation and amortisation (EBITDA) before exceptional items as a percentage of revenue. It is a measure of how efficiently revenue is converted into EBITDA. Real Cost Savings Sustainable real cost savings are an important driver of value and a measure of our operational excellence. Xstrata’s performance in achieving real cost savings is shown against the average for the FTSE Diversifieds. Cost savings are shown as a percentage of net operating costs, based on contribution to EBIT variance. EPS US¢ Xstrata* CAGR† 70% 02 52 03 33 04 05 156 242 434 EBITDA $m Xstrata* CAGR† 104% 02 414 03 699 04 05 2,075 3,103 7,107 EBITDA Margin % Xstrata* CAGR† 20% 02 03 04 05 22.9% 20.1% 32.1% 38.5% 40.3% Real Cost Savings % Xstrata 2002-2006 average: 1.8% 02 03 04 1.0% 0.9% 4.7% 05 0.4% 06 FTSE Diversifieds* CAGR† 44% 02 88 03 85 04 05 143 252 06 06 06 1.0% FTSE Diversifieds* CAGR† 35% 02 4,502 03 04 05 4,821 7,349 10,893 14,846 FTSE Diversifieds* CAGR† 16% 02 03 04 05 28.8% 25.3% 29.2% 36.6% 41.5% FTSE Diversifieds** 2002-2006 average: -1.0% 03 -0.9% -4.2% -4.6% 04 05 02 0.3% 0.7% 06 379 06 06 06 Total Shareholder Return TSR calculates the total return from an investment in Xstrata, calculated from the growth in share price together with the dividend income from the shares, with dividend income assumed to be reinvested. The graph shows the total return for a £100 investment in Xstrata plc, benchmarked against the FTSE100 index of the largest UK companies. 800 600 400 200 0 GBP FTSE 100 Xstrata plc 19 March 02 31 Dec 02 31 Dec 03 31 Dec 04 30 Dec 05 29 Dec 06 * Xstrata EPS and EBITDA on statutory basis (i.e acquisitions included from date of transaction completion); EPS adjusted for rights issues. Weighted average for Anglo American, BHP Billiton and Rio Tinto; BHP Billiton adjusted to December financial year for comparison purposes ** Based on reported cost variance contribution to annual profit variance; FTSE Diversifieds adjusted to include mining inflation impact † Compound annual growth rate (CAGR) 2002-2006 Xstrata plc Annual Report 2006 | 27 Employees Employee turnover is a measure of our success in retaining our people. Turnover is shown below for Xstrata only (2005) and for the enlarged Xstrata Group in 2006, including the acquisitions from the date of completion. 2005 data is not available for the former Falconbridge businesses. Health Xstrata’s operations aim to identify, assess and control occupational health hazards and, where practicable, to eliminate work-related diseases. The bar charts below show the number of new occupational illness cases reported by Xstrata only (2005) and by the enlarged Xstrata Group in 2006, showing the contribution of the former Falconbridge business from the date of acquisition. Safety We believe that every workrelated incident, illness and injury is preventable. Total recordable injuries include lost time injuries, medical treatment injuries and restricted work injuries, providing a more complete measure of safety performance. The total recordable frequency rate is reported per million hours worked. The data below shows Xstrata excluding Falconbridge, with the former Falconbridge Group reported separately. Corporate Social Involvement Xstrata sets aside 1% of annual Group profit before tax to fund initiatives that benefit local communities. This chart shows the amount set aside for initiatives in each geographic region in which Xstrata operates and by category. Each operation, together with local communities, develops a social involvement plan to identify and support initiatives in the areas of health, education, environment, job creation and enterprise, community development and arts and culture. Employee Turnover % Xstrata Group 05 10.3 5.2 Occupational Illness Cases Total Recordable Injury Frequency Rate Xstrata Only $million Xstrata Total 05 37 31 58 05 15.0 13.0 05 24.7 49.2 06 Alloys 05 06 06 Falconbridge Only 05 n/a 06 Xstrata only 7.0 5.7 Falconbridge only 06 Aluminum 05 n/a 4.4 06 2005 Alloys 05 Coal 43% Alloys 57% 8.6 11.5 8.0 24.2 2006 by category Environment 4% Culture/art 3% Health 21% Unclassified 1% Education 18% 16.4 17.1 Enterprise and job creation 6% 06 Coal 05 06 Coal 05 Social/community development 47% 06 Copper 05 4.5 06 2006 14.4 Nickel 3% Alloys 30% Copper 05 12.9 9.7 2006 by geography Australia 17% Europe 3% 24.5 22.4 South America 48% South Africa 22% North America 10% 06 Nickel 05 n/a 5.0 Zinc 38% Coal 17% 3.9 Copper 12% 06 Zinc 05 06 Zinc 05 06 Technology 15.7 7.6 05 15.9 16.4 06 Technology 05 6.0 06 06 13.6 28 | Xstrata plc Annual Report 2006 Business Overview & Strategy | Key Performance Indicators Xstrata also publishes a separate Sustainability Report, which includes a full set of indicators, using the Global Reporting Initiative G3 guidelines. The report is available from www.xstrata.com or as a hard copy on request. Greenhouse Gases Greenhouse gas emissions (GHGs) are measured as CO2 equivalent tonnes. Xstrata’s main sources of GHGs are from electricity used and from methane found in underground coal seams in some regions. We seek to reduce greenhouse gas emissions through improved energy efficiency and by using coal-seam methane to generate power wherever possible. Water Effective water management and conservation is critical to Xstrata’s operations, a number of which are located in arid regions. Xstrata measures raw water used and water recycled. We seek to reduce raw water extracted and progressively increase the amount of water that is recycled. Waste Xstrata’s operations measure hazardous and non-hazardous waste. The figures reported exclude over-burden removed during mining activities. Every site is required to implement a full waste management plan, progressively decreasing the volume of waste sent to landfill. Waste is reported on a standalone basis for Xstrata excluding Falconbridge. SO2 Emissions Sulphur dioxide (SO2) is Xstrata’s primary air emission. SO2 emissions are predominantly generated from metallurgical operations. We seek to reduce SO2 emissions year on year at each relevant location. CO2 equivalents million tonnes Xstrata 05 14.5 15.9 Water megalitres Raw water use Xstrata 05 75,300 85,600 Waste thousand tonnes Hazardous Waste 05 1,010 1,416 SO2 emissions tonnes Xstrata 05 238,564 235,181 06 Falconbridge 05 7.1 7.2 06 Onsite disposal Offsite disposal 223,500 208,000 Reused 06 Falconbridge 05 06 Falconbridge 05 104,266 130,217 06 06 06 Recycled water Xstrata 05 Non-Hazardous Waste 05 88,417 99,770 06 98,900 101,300 Tailings, coarse reject and slag General waste to landfill Other (quench ash) 06 Falconbridge 05 100,100 102,300 06 Markets Positioning Products 30 | Xstrata plc Annual Report 2006 Markets Ferrochrome The stainless steel market, which accounts for over 80% of global ferrochrome demand, displayed robust growth in 2006. Global demand for alloys stainless melt is estimated at approximately 28 million tonnes, some 14% higher than the previous year. The stainless steel market experienced particularly strong growth from the second quarter, with most major European, American, Asian and Chinese stainless mills operating at full capacity. XA Sales by geography Africa 5% Europe 48% North America 13% Asia 34% China is by some margin the largest stainless steel producing country, with stainless melt production of approximately 5.6 million tonnes in 2006, and also remains the most important driver of global demand growth. In response to strong growth in demand for stainless steel, demand for ferrochrome increased by an estimated 10% in 2006, bringing global demand to 6.3 million tonnes. The lower growth rate in ferrochrome demand compared to stainless steel is due in part to increased production of high carbon ferrochrome, which has a higher chrome content, and the use of chrome-bearing nickel pig iron by Chinese producers, to cushion the impact of high nickel prices. Despite sustained higher nickel prices, the ratio of stainless steel scrap used in Austenitic stainless melt declined by 1% in 2006 to 42% due to lack of scrap availability, further supporting demand for ferrochrome. China has emerged as a significant producer of ferrochrome and has almost doubled ferrochrome output from 494,000 tonnes in 2004 to 925,000 tonnes in 2006, meeting the bulk of increased demand from China and globally. However, as Chinese stainless melt and ferrochrome demand continue to increase, it is expected that environmental pressure, limited availability of electric power and reliance on imported ore will combine to restrict further expansions in Chinese ferrochrome production, resulting in increased alloy imports. The Chinese government recently halved the import duty on ferrochrome to 1%. Firm capacity expansion projects have also been announced for South Africa, India and Russia over the next four years. Ferrochrome base prices continued to come under pressure in the first quarter following a 5¢ price decrease to 68¢ per pound at the end of 2005, falling to 63¢ per pound. The strong recovery in demand seen from the second quarter resulted in prices rapidly rebounding to 70.25¢ per pound, with further increases in the two subsequent quarters to 75¢ per pound and 78¢ per pound respectively. Strong stainless melt production is expected to continue, with China anticipated to increase production further to approximately 6.5 million tonnes in 2007. As a result, the momentum gained during the year in ferrochrome demand is set to continue into the first half of 2007. Longer term, stainless steel demand is forecast to grow at approximately 6% per annum, which should result in similar growth in global ferrochrome demand. Stainless steel demand is forecast to grow at approximately 6% per annum. Xstrata plc Annual Report 2006 | 31 Vanadium Production of crude steel, the major market for vanadium, continued to grow, increasing by approximately 9% in 2006. Demand from China was again the primary driver, where crude steel production increased by 18% and accounted for more than a third of the world’s production in 2006. It is anticipated that lower vanadium prices will result in reverse substitution. This is, in turn, expected to support prices and limit volatility in 2007. Platinum Group Metals Sales by geography Africa 3% Europe 57% North America 18% South America 4% Asia 17% Australasia 1% Strong demand for crude steel has been underpinned by relatively strong economic growth in Europe, CIS, North America and especially China, which together account for nearly 70% of global vanadium demand. Vanadium supply increased in response to strong demand and has resulted in a continued strong vanadium market in relative equilibrium. Ferrovanadium prices have declined from the record high prices seen in 2005, with the average price declining to $38.50 per kilogram in 2006, down from $70.50 per kilogram in 2005. Prices appear to have stabilized at around $30 per kilogram throughout the fourth quarter of 2006 and into 2007, well above long term average prices. Prices are expected to remain above historical levels for 2007. New supply is likely to emerge from the two major Chinese producers, where additional capacity is planned, and potentially from Western Australia by the end of 2007. However, with further growth anticipated in crude steel production, demand for vanadium units should remain firm during 2007. The extended period of elevated vanadium prices is, however, resulting in predominantly temporary substitution in certain applications such as commodity grade rebar. Worldwide ferro-niobium consumption has increased significantly, with the majority of ferro-niobium consumption growth coming from China. The second half of 2006 was marked by a strong rally in the platinum market, propelling prices to a 25-year high of $1,415 per ounce in November 2006. High rhodium prices also further enhanced the profitability of platinum group metals (PGM) producers mining the UG2 reef within the Bushveld Igneous Complex, which has a higher rhodium content. The rhodium price continued its three-year climb reaching a high of $6,275 per ounce in May 2006. The positive outlook for PGM prices is supported by improved supply-demand fundamentals and is expected to continue in the short term. Growth in demand is expected to continue due to the growing European market for auto catalysts, with good potential for this market to grow further in the US in the near future. 32 | Xstrata plc Annual Report 2006 Markets Aluminium The aluminium market experienced a third consecutive year of supply shortfall with a deficit of approximately 250,000 tonnes during 2006. aluminum As at the end of December 2006, combined producer, LME and COMEX inventories remained low, representing approximately 3.6 weeks of global consumption. XAl Sales by geography North America 100% Healthy market fundamentals in aluminium pushed the LME aluminium cash price to a multi-year high of $3,275 per tonne on 11 May 2006. The average LME cash price in 2006 was $2,570 per tonne, 35% higher than the 2005 average of $1,898 per tonne. At the end of 2006, the LME price closed at $2,850 per tonne, well above the annual average and prices have remained robust into the first quarter of 2007. Globally, consumption of aluminium is estimated to have increased by 7% over the previous year. Demand grew strongly in China, up by approximately 20% over 2005 levels to represent nearly a quarter of total global demand, consolidating China’s position as the world’s largest consumer of primary aluminium. Demand growth from North America and Western Europe was more modest, with a slight decline in consumption in Japan year-on-year. Global aluminium production increased by approximately 6% in 2006, with China again the largest producing nation, reporting a 19% increase in primary aluminium production over the previous year. Other regions experiencing production growth included the Middle East, South America and Australia, while production from the US and Western Europe declined slightly year-on-year. In 2007, demand and production from China will continue to be the dominant factors in determining the global supply/demand balance in the aluminium market. Recent analyst forecasts have moved from projecting a small deficit in 2007 to a modest surplus, on the back of more rapid production growth from China. With global demand growth forecast to be at, or near, the levels seen in 2006 and inventory levels already low, any shortfall in this projected production growth should be very supportive of the aluminium price during 2007. Alumina prices were volatile during 2006, peaking at over $600 per tonne in May before falling to around $200 per tonne by year end. However, spot prices rebounded quickly in the early part of 2007. Analysts had been forecasting a significant surplus in the global alumina market for 2007, but delays to planned expansions and curtailment of marginal capacity should be supportive to spot prices during the coming year. Power costs continue to be a concern for some smelters with operations in Western Europe, the US, and more recently South Africa, experiencing difficulties. Regional power grids in developing countries may continue to come under severe strain, resulting in periods of disruption to supply and loss of aluminium production. Despite strong demand throughout most of 2006, weak US housing starts and industrial customer de-stocking resulted in a smaller than expected demand growth of only 1.5% for aluminium foil products in the US and Canada. North American imports of Chinese aluminium foil products increased by approximately 20% in 2006. If US trade representative complaints against China’s subsidised 13% VAT rebate on exports of aluminium foil and other semi-fabricated aluminium products are successful, this would severely limit the economic viability of these products into the North American market. Xstrata plc Annual Report 2006 | 33 Demand for imported seaborne thermal coal in the Pacific Basin remained strong during 2006, with import tonnages growing by over 8% for the third coal consecutive year. As in 2005, the majority of 2006 Pacific demand growth was fuelled by the emerging economies of China, India and Latin America, supported by continued growth from the traditional North Asian markets of Japan, Korea and Taiwan. XC Pacific thermal coal Sales by geography Europe 1% North America 7% Australasia 10% South America 1% Asia 81% Growth in Chinese demand for thermal coal pushed domestic Chinese coal prices above import prices. As a result, not only did Chinese thermal coal exports decline by around 11% or 6.5 million tonnes in 2006, but coastal utilities further increased their import requirements, resulting in imports from Australia and Indonesia to China increasing by over 130% or 7 million tonnes in 2006. India faced a similar shortfall of domestic thermal coal and resulted in an increase of approximately 15% in imports. Thermal coal demand into the major markets of Japan, Korea and Taiwan increased by an estimated 2% over 2005 levels, as new coal-fired power stations were commissioned. As a result of this demand growth and the market’s recognition that export volumes from the Hunter Valley were stabilising at levels significantly below initial expectations, the first half of 2006 saw a swift recovery in Newcastle spot prices, increasing from around $40 per tonne in early January and stabilising within the range of $51 to $54 per tonne. Xstrata Coal secured annual contracts prices with the majority of Japanese utilities at around $52.50 per tonne free on board (FOB). The prices were effective for the year commencing 1 April 2006, slightly down on average prices in 2005. In the second half of 2006, an apparent oversupply in the Pacific induced by de-stocking caused spot prices to slide to around $41 per tonne in late November. However, the continued decline in Chinese export volumes brought buyers into the market to cover Chinese shortfalls and this, combined with the onset of winter buying, led to a rapid recovery in prices. The FOB Newcastle spot price was over $50 per tonne at the close of 2006. Average received prices for Xstrata’s Australian thermal coal declined from $51.20 per tonne in 2005 to $46.40 in 2006. The Asian market accounted for over 75% of Xstrata’s managed export thermal coal sales from Australia in 2006 with Japan, Korea and Taiwan remaining dominant. Term and annual contracts comprised 60% of Xstrata Coal‘s Australian managed export thermal sales in 2006, with the balance sold on the spot market. Market supply was characterised by surging Indonesian export growth, of which a significant proportion went into Europe, flat exports from Australia and a substantial decline in Chinese exports. Despite the progress made in improving the export coal chain, Australia’s export growth in 2006 continued to be constrained by supply-side issues, including production problems at several large New South Wales mines, labour and equipment shortages and ongoing infrastructure constraints. The Hunter Valley coal chain’s ‘Capacity Balancing Scheme’, approved by the Australian Competition and Consumer Commission (ACCC), proved successful in ensuring minimal queuing at the Newcastle port throughout most of 2006. This scheme was annulled in September and subsequently the shipping queue at Newcastle has grown. Following producer and Port Waratah Coal Services agreement, it is anticipated 34 | Xstrata plc Annual Report 2006 Markets | Coal Sales by geography Middle East 3% North America 8% South America 9% Asia 1% Europe 77% Australasia 2% that the ACCC will ratify the reintroduction of a Capacity Balancing Scheme towards the end of the first quarter of 2007. Xstrata Coal continues to maintain a stable and balanced domestic portfolio to provide geographic and currency diversification. Domestic thermal coal sales remain predominantly long-term contracts with power utilities in both New South Wales and Queensland and represent about 20% of total managed thermal coal sales from Xstrata Coal’s Australian operations. bottlenecks and mine production disruptions, this was largely offset by improved volumes during the second half, due to a stable performance from the rail network and the recovery of export production. In 2006 total South African export volumes of approximately 67 million tonnes were slightly lower than the 69 million tonnes exported in 2005. Export sales from Xstrata Coal’s South African operations were 1% lower than in 2005, and account for about two-thirds of the Group’s total South African sales tonnage. Export volumes from Colombia increased overall by about 7%, despite some production disruptions caused by industrial action and minor impacts from weather and equipment availability. The major portion of this growth went into the Americas with the balance into Europe. Export thermal coal demand in North and South America grew by approximately 14% year-on-year, and this trend is expected to continue. On a pro forma basis, average received prices declined slightly from $51.72 per tonne in 2005 to $49.30 per tonne in 2006. The price of carbon credits, allocated and traded under the EU emissions trading scheme, was volatile throughout 2006, fluctuating from a high of ?30 per tonne to a low of ?6 per tonne. On average, carbon credit prices in 2006 exceeded the prior year average. Nonetheless, seaborne coal exports to Europe in 2006 are estimated to have increased by approximately 8% over the prior year. For the majority of 2006, imported coal remained the least expensive fossil fuel for electricity generation. The South African domestic market, which accounted for around a third of Xstrata Coal’s South African sales volumes, also remained robust during 2006. Supply of higher-grade industrial products remained tight and, together with increasing demand for lower-grade coals from Eskom, supported domestic coal prices. Both new and extended annual contracts for the supply of low quality coal to Eskom contributed to an overall increase in Xstrata’s sales to the Eskom market of 15% over 2005 levels. Average received prices from Eskom increased by 4% in 2006 due to inflation-related adjustments coupled with changes in quality mix and delivery bases. Non-Eskom domestic sales volumes decreased by 20% in 2006, as coal was diverted to meet higher margin export demand. The majority of non-Eskom domestic contracts from Xstrata South African coal operations achieved aboveinflation increases, but this was also coupled with a change in quality mix resulting in an average price increase of 22% year-on-year. Atlantic thermal coal markets Atlantic export coal prices strengthened during the first half of 2006 from spot prices of $43 per tonne in January to a peak of above $55 per tonne in March, thereafter stabilising at between $47 and $53 per tonne. Average received prices declined slightly from $48.50 per tonnes in 2005 to $45.80 per tonne in 2006. The European and Mediterranean import market grew by around 8% with imports from the Americas up by around 14% year-on-year. The strong European market largely reflected the robust but volatile energy market in Europe during the year as oil, gas and electricity prices reached record levels. Although South African export tonnages were constrained during the first half of the year by a combination of rail Coking coal markets Term prices for premium quality hard coking coal were established by the BHP Billiton Mitsubishi Alliance (BMA) and the Japanese Steel Mills (JSM) in January 2006 at about $115 per tonne, some 8% lower year-on-year. Prices for lower quality hard coking coals were discounted by a greater percentage, reflecting the increasing supply of these lesser grade coals. Despite a further drop from the record prices achieved in 2004, demand for hard coking coal remains robust and continues to command a high premium over historical prices Xstrata Coal’s hard coking coal prices for the 2006-07 contract year were agreed with term customers in Europe and Asia at an average level of $114 FOB per tonne. During 2006, the vast majority of Xstrata plc Annual Report 2006 | 35 Xstrata Coal’s hard coking coal was sold under long term contracts, with 60% of output going to Asian markets, 24% to Europe, and the balance to the Americas, Africa, Australia and the Middle East. The high premium for hard coking coal during 2006 has resulted in increased interest by non-traditional European markets for Xstrata’s high volatile semisoft coking coal to reduce costs. Prices for Xstrata’s semi soft coking coals were settled at an average level above $59 FOB per tonne. Average received prices for Xstrata’s hard coking coal remained at a similar level to the previous year, at slightly over $111 per tonne. Japanese steel mills were once again the dominant buyers of coking coal in 2006, accounting for over 60% of Xstrata’s total sales including semi soft. Coking coal was predominantly sold under long-term contracts with spot market sales comprising less than 30% of total sales. Steel companies are showing considerable interest in the prime low volatile coking coal produced from Xstrata’s new Wollombi mine. Shipments from this operation commenced in the fourth quarter. Demand for seaborne metallurgical coal remained constant over the course of 2006. Global steel prices strengthened in most regions from the second quarter and despite falling slightly in the second half, remain well above historical levels. Pig iron production increased by 24% in China in 2006, compared to 2.5% annual growth in the rest of the world and just 1% growth in coking coal importing countries excluding China. Lower quality domestic coking coals, rather than imports, have largely fuelled increased Chinese pig iron production, and, as a result of significantly higher export prices, China imported 39% less coking coal in 2006 than in the previous year. Australian coking coal exports declined marginally during the first half of 2006, principally attributable to production difficulties, skills shortages and a series of planned longwall moves, rather than any market impact. During the second half of the year, production recovered resulting in total Australian coking coal export growth of more than 3 million tonnes for 2006 compared to 2005. Canadian exports remained in line with 2005 levels and lower US coking coal exports were offset by small increases from Poland, New Zealand and Indonesia. Global steel production forecasts continue to show growth in Brazil, Russia, India and China. Construction of new integrated blast furnaces in Brazil and India in particular, will continue to drive demand growth for imported coking coal whilst further growth is also forecast in Japan, Korea and Taiwan as new coke-making capacity comes on line. Sales by geography Middle East 2% Africa 7% North America 2% South America 7% Europe 27% Australasia 1% Asia 52% 36 | Xstrata plc Annual Report 2006 Markets Copper Supply side disruptions, strong demand growth and low exchange inventories drove copper prices to new highs in real terms during 2006. copper The LME copper cash price averaged $3.06 per pound or $6,740 per tonne for the year, representing an increase of 83% over the average price in 2005. XCu Sales by geography Europe 18% Australasia 6% North America 41% Asia 26% South America 9% In contrast to 2005, copper demand from the major Western consuming regions was stronger than expected, while apparent Chinese consumption growth has been limited by inventory de-stocking. Global copper exchange inventories increased by more than 96,000 tonnes over the year to 252,533 tonnes at the end of 2006. Much of this increase occurred during the fourth quarter, due to slowing economic conditions in the US as well as inventory de-stocking ahead of the financial yearend. Despite this increase, exchange stocks remained at a critically low level and at the end of 2006 represented five days of global consumption. The oversupply of copper concentrate that accumulated in 2005 was progressively eroded during 2006 through a combination of increased global smelting capacity and a series of mine production problems in the industry. This tightening concentrate situation drove spot concentrate treatment and refining charges down from $135 per dry metric tonne and 13.5¢ per pound at the beginning of 2006 to around $50 per dry metric tonne and 5¢ per pound by year-end. Further growth in smelting capacity should continue to outstrip mine supply and maintain the downward trend in treatment and refining charges in 2007. Although slowing economic growth is likely to generate weaker demand conditions in the US during the year, this is likely to be offset by continuing refined copper demand growth in China and Europe, together with an expected end to Chinese inventory de-stocking. These factors, together with the potential for further supply-side disruptions, should help to support another year of strong copper prices. Continuing demand growth in China and Europe, together with an end to Chinese de-stocking and the potential for supply-side disruptions should support another year of strong copper prices. Xstrata plc Annual Report 2006 | 37 u XNi nickel Nickel Global consumption of primary nickel is estimated to have increased by 12% in 2006, principally driven by strong growth in the stainless steel market, which accounts for approximately two-thirds of global nickel demand. Significant de-stocking of the stainless steel market in the latter part of 2005, together with strong global economic growth in 2006, drove increased demand for stainless steel during the year. Global stainless steel production reached record volumes in the first half, boosted by the commissioning of an estimated nearly 2 million tonnes of new stainless steel production capacity in China. Seasonal summer shutdowns at European and North American mills temporarily offset some of the demand pressure for nickel, leading to a more balanced physical market. However, with order books at the mills booked into the first quarter of 2007, previous production rates were quickly resumed and continued to the end of the year. As a result, stainless steel production for 2006 is estimated at 28 million tonnes, an increase of some 14% from the previous year. Demand was also very strong from non-stainless steel sectors, such as foundry and nickel alloys, and especially from the aerospace, oil and gas, and power generation industries. On the supply side, more than 40,000 tonnes of nickel production losses were announced during the course of 2006, Sales by geography Africa 1% Europe 54% North America 21% contributing to tightness in the market. With many nickel producers operating at high capacity utilization rates and postponing or forgoing maintenance shutdowns, there is a greater risk of future potential disruptions to operations in 2007 and beyond. Elevated nickel prices in 2006, together with a 45% increase in stainless steel production by Chinese mills, also led to the emergence of a new source of primary nickel. Chinese ferronickel and pig iron plants began importing significant quantities of low-grade laterite nickel ores from the Philippines, for conversion in blast furnaces into low grade nickel pig-iron, producing between 20,000 and 40,000 tonnes of contained nickel. Break-even costs for this high cost, marginal supply are estimated by market analysts to be in the range of $8 to $11 per pound. While Chinese stainless steel producers are likely to increase imports of laterite nickel ores in 2007, this additional supply, together with imported and domestically produced refined nickel, will be absorbed by planned expansions in stainless steel production. As a result, the net impact on the global nickel market is likely to be neutral. The nickel market is estimated to have recorded a deficit of 34,000 tonnes in 2006, with most of the deficit occurring during the first seven months, as evidenced by the run-down of LME stocks during the period. Strong physical demand for nickel and tight nickel supply, together with investment fund interest in commodities, helped to fuel an unprecedented rise in the LME nickel cash price from $6.25 per pound ($13,786 per tonne) at the start of the year to around $15.74 per pound ($34,700 per tonne) in late August and later peaking at $16.16 per pound ($35,635 per tonne) in December. For the latter part of the year, the market remained in equilibrium, as LME stock levels remained within a narrow range, finishing the year at 6,600 tonnes, representing 1.5 days of global consumption, and with prices trading in the range of $13 to $16 per pound ($28,000 to $35,000 per tonne). The average LME nickel cash price more than doubled compared to the previous year, reaching $10.96 per pound ($24,155 per tonne), up from $6.68 per pound in 2005 ($14,732 per tonne). Demand is expected to remain strong from the non-stainless steel sector and particularly from super alloys producers in 2007. However, overall demand growth for nickel is expected to moderate somewhat during the year. In addition, with a number of major producers sold out and LME inventories at critically low levels, the nickel market will not be able to accommodate a deficit, and cannot sustain global nickel demand growth in excess of 4% year-onyear. Importantly, while nickel supply is forecast to increase by 7% or around 95,000 tonnes in 2007, this additional supply will not be enough to satisfy anticipated demand, even when factoring in a decelerating economic cycle. Under such conditions, the short and mid-term price outlook remains favourable with prices expected to remain well above long-term averages. The tightness of the market and further potential supply shocks are also likely to lead to price volatility in 2007. Asia 24% 38 | Xstrata plc Annual Report 2006 Markets Zinc For the third consecutive year, production of refined zinc fell short of global demand in 2006, creating a supply deficit of around 400,000 tonnes of zinc zinc metal. Continued strong growth in demand from Asia, combined with renewed growth in the USA and Europe, drove a 4% increase in global demand for refined zinc to around 11 million tonnes. Demand was met by a drawdown of 306,000 tonnes of LME stocks and 88,000 tonnes of stocks held elsewhere during the year. LME stocks fell to 88,500 tonnes at the end of the year, the lowest level recorded since April 1991 and less than three days of global consumption. XZn Strong market fundamentals combined with investment fund buying drove prices up strongly in the first half of the year, and, after a weaker third quarter, again in the fourth quarter peaking at $4,619 per tonne in November. The average LME zinc price increased by 137% in 2006 to $3,264 per tonne, up from an average of $1,382 per tonne in 2005. Global zinc concentrate production responded to higher prices in 2006, increasing by 6.7% to 10.7 million tonnes. China, India and Kazakhstan accounted for the majority of global mine supply growth, principally from existing mine operations. The concentrates market remained tight during the year, resulting in a further drop in negotiated treatment charges. Benchmark treatment charges fell from $126 per tonne basis $1,000 zinc in 2005 to $128 per tonne basis $1,400 zinc in 2006, equivalent to $80 per tonne at a $1,000 zinc price basis. The tightness in the supply of zinc concentrate is anticipated to ease in 2007 as new mines come into production during the year. With the majority of zinc stocks depleted, zinc supply is expected to experience a small deficit in 2007, as new mine supply becomes available to increase refined metal production levels and almost meet forecast global demand requirements. Demand in China, India, South East Asia and Eastern Europe will continue to support steady consumption growth. Stocks are expected to remain low supporting a continued strong price environment in 2007. Sales by geography North America 29% Europe 61% Asia 9% Australasia 1% Domestic demand in China continued to grow strongly, reflecting robust economic growth and a surge in new galvanizing capacity in response to booming demand from the automotive and home appliance sectors, as well as from extensive construction and infrastructure investment. In 2006, global zinc metal production rose in response to increased demand, continued higher prices and improved concentrate availability. Metal output increased by 6%, the highest annual growth since 2000. The largest increase in refined production was in China, where metal output increased by 14% to three million tonnes. Increased refined production from China, India and Kazakhstan, combined with incremental improvements at many western smelters, enabled metal supply to reach 10.7 million tonnes in 2006. Demand in China, India, South East Asia and Eastern Europe will continue to support steady consumption growth. Xstrata plc Annual Report 2006 | 39 Lead Global consumption of refined lead rose by over 4.5% to 7.95 million tonnes in 2006. China continues to exert a significant and growing influence on the global lead market, where lead usage has risen strongly in recent years, driven by surging battery production due to the country’s rapidly expanding automobile and communications sectors. Global production of refined lead increased by 5% to 7.9 million tonnes in 2006. Around half of this amount came from secondary production, mainly from battery recycling. In China, primary lead production increased by 12% while secondary production increased by 21%. As a result, the refined lead market was in supply deficit in 2006 with lead stocks at LME warehouses remaining at very low levels during the period. At the end of 2006, LME stocks of 41,125 tonnes represented less than one week of global consumption. During the year, the cash price for lead traded between $914 and $1,809 per tonne, to finish the year at $1,775 per tonne. The average price in 2006 was $1,287 per tonne, 31% higher than the previous year. Backwardation was again a key feature of trading throughout the year, reflecting the tight physical market. The lead market is expected to be largely balanced in 2007 with global lead consumption anticipated to continue to grow, but at a comparable rate to 2006. China will continue to be a dominant force in both consumption and production. Despite strongly increasing domestic demand, exports of refined lead from China are expected to remain at similar levels to 2006 as domestic lead mine production responds to high price levels. Lead stocks should continue to remain at low levels and consequently the market is expected to remain fairly tight throughout 2007, supporting lead prices. Sales by geography Middle East 2% North America 3% Europe 95% Financial Review Strength Accountability Xstrata plc Annual Report 2006 | 41 Key Financial Results Consolidated pro forma results $m Year ended 31.12.06 Year ended 31.12.05 % Change Revenue EBITDA* EBIT* Attributable profit Earnings per share (basic, pre-exceptionals)*** Cash generated from operations Net debt to net debt plus equity (%)** Net assets** Net assets per share** Dividends per share: – interim dividend (paid) – final dividend (proposed) 26,877 10,441 8,340 4,885 $5.13 9,370 41% 19,722 20.82 17,199 5,843 3,932 2,232 $2.52 4,667 24% 8,137 13.57 56% 79% 112% 119% 104% 101% 71% 142% 53% 11.6¢† 30.0¢ 8.1¢‡ 22.4¢‡ 43% 34% *Excludes exceptional items **Assets and debt relate to the statutory balance sheets at year end ***Pro forma weighted average number of shares of 864.15 million and 925.41 million have been calculated as if the share issues in 2006 had been made on 1 January 2005 and 1 January 2006 respectively †2006 interim dividend paid was 13¢ per share: adjusted to 11.6¢ for rights issue impact ‡2005 dividends have been adjusted for rights issue impact Basis of presentation of financial information Financial information is presented in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the European Union. The reporting currency of Xstrata plc is US dollars. Financial statements of subsidiaries are maintained in their functional currencies and converted to US dollars on consolidation of Group results. Unless indicated to the contrary, revenue, earnings before interest, taxation, depreciation and amortisation (EBITDA) and earnings before interest and taxation (EBIT) are reported in the Chief Executive’s Report and the Operating and Financial Review before exceptional items. All commentary in the Business Review, except where otherwise stated, refers to pro forma results for 2005 and for 2006, including the acquisitions of Falconbridge Limited, the Tintaya operation and a one-third interest in the Cerrejón coal operation from 1 January 2005 and 2006 respectively. This provides a more meaningful illustration of the scale and performance of the enlarged group after the acquisitions. A reconciliation of the pro forma to statutory results is set out in the supplementary information. A summary of statutory results and commentary relating to these results is provided below. Exceptional items are significant items of income and expense which, due to their nature or expected infrequency, are presented separately in the income statement. All dollar and cent figures provided refer to US dollars and cents. 42 | Xstrata plc Annual Report 2006 Financial Review Consolidated statutory operational results $m Year ended 31.12.06 Year ended 31.12.05 Alloys Aluminium Coal Copper Nickel Zinc Technology Total Group Revenue Attributable Total Group Revenue Alloys Aluminium Coal Copper Nickel Zinc Technology Share of earnings from Falconbridge Corporate and unallocated Total Group EBITDA Attributable Total Group EBITDA Alloys Aluminium Coal Copper Nickel Zinc Technology Share of earnings from Falconbridge Corporate and unallocated Total Group EBIT Attributable Total Group EBIT 959 530 3,617 7,007 1,678 3,721 120 17,632 16,680 263 123 1,249 3,349 788 1,479 26 – (170) 7,107 6,480 234 98 892 2,850 614 1,329 22 – (176) 5,863 5,298 1,116 – 3,400 2,008 – 1,449 77 8,050 7,228 350 – 1,346 1,131 – 303 14 21 (62) 3,103 2,715 317 – 1,079 920 – 239 10 21 (66) 2,520 2,200 The acquisitions completed in 2006 have been consolidated in the IFRS statutory income statement from their respective dates of acquisition, as below: Cerrejón coal (one-third interest) Tintaya copper operation Falconbridge Limited 20 April 2006 21 June 2006 15 August 2006 Statutory Group turnover for the year ended 31 December 2006 increased from $8,050 million to $17,632 million, as average commodity prices continued to rise year-on-year across Xstrata’s portfolio, in particular for base metals and as a consequence of the acquisitions made. Xstrata plc Annual Report 2006 | 43 Statutory Group EBITDA for the year ended 31 December 2006 increased by 129% to $7,107 million. The positive impact of the acquisitions and higher LME metals prices more than offset the cost pressures being experienced across the mining industry. Statutory Group EBIT for the year ended 31 December 2006 increased from $2,520 million to $5,863 million, or by 133%. The acquisition of Falconbridge was completed through two transactions. Xstrata acquired 20% of Falconbridge at C$28 per share in August 2005, before acquiring the remaining 80% in 2006 at a price of C$62.50 per share. The average price paid per share was C$56.44. Xstrata’s ability to average the purchase price paid for the second tranche of shares over the full purchase provided Xstrata with a compelling competitive advantage and was a significant factor in the success of the transaction. Consolidated pro forma operational results $m Year ended 31.12.06 Year ended 31.12.05 Alloys Aluminium Coal Copper Nickel Zinc Technology Total Group Revenue Attributable Total Group Revenue Alloys Aluminium Coal Copper Nickel Zinc Technology Corporate and unallocated Total Group EBITDA Attributable Total Group EBITDA Alloys Aluminium Coal Copper Nickel Zinc Technology Corporate and unallocated Total Group EBIT Attributable Total Group EBIT 959 1,395 3,757 12,508 3,364 4,774 120 26,877 25,924 263 286 1,320 5,399 1,386 1,946 26 (185) 10,441 9,814 234 208 937 4,528 931 1,673 22 (193) 8,340 7,773 1,116 1,080 3,841 6,927 2,161 1,997 77 17,199 16,377 350 158 1,588 2,697 721 398 14 (83) 5,843 5,455 317 75 1,256 1,852 333 186 10 (97) 3,932 3,612 44 | Xstrata plc Annual Report 2006 Financial Review Under IFRS, this advantage cannot be recognised, as goodwill is calculated separately for each transaction, regardless of the average price paid per share to acquire the 100% interest. This accounting treatment has resulted in the creation of significant additional goodwill of $1.5 billion. Xstrata has completed a detailed fair value evaluation of the assets acquired and, in accordance with IFRS, tested the goodwill for impairment. As a result, the company has determined that an impairment charge of $1,378 million to the 2006 statutory income statement is appropriate in the light of the IFRS valuation of the assets. The impairment has no impact on the 2006 pro forma accounts. Revenues in 2006 rose by 56% to $27 billion, predominantly due to the positive impact of sustained, stronger commodity prices, particularly in exchange-traded metals. EBITDA increased by 79% to $10,441 million and EBIT more than doubled to $8,340 million. EBIT variances shown below have been calculated on the basis of a comparison between the statutory 2005 earnings and pro forma 2006 earnings for the former Xstrata Group. To enable a meaningful evaluation of the performance of the former Xstrata Group, the contribution to pro forma earnings of the Falconbridge, Tintaya and Cerrejón acquisitions is included as one line. These acquisitions contributed a total of $4,623 million to pro forma 2006 EBIT. Higher received sales prices for the majority of Xstrata’s commodities, in particular for copper and zinc, together with the impact of a stronger US dollar compared to local currencies, contributed $1,798 million to EBIT. Higher volumes were achieved at Xstrata’s Australian coal operations, in particular from the coking coal operations and the Rolleston thermal coal mine which was officially opened in 2006. However, these were more than offset by lower volumes from the north Queensland copper assets due to lower head grades, and lower recoveries from the Mount Isa zinc-lead concentrator due to the transition to processing lower grade ores from the Black Star mine. Continued robust demand and shortages for key inputs including raw materials and mining equipment, together with increased competition for skilled labour have again resulted in extraordinary increases in mining industry input prices, far in advance of CPI inflation. As set out in the 2006 interim report, Xstrata’s commodity businesses have calculated the extraordinary impact of inflation on input prices specific to the mining industry, using third party indices. Based on these calculations, mining inflation increased Group operating costs by $112 million, over and above CPI inflation of $162 million in 2006, compared to the same period in 2005. Stripping out the impact of CPI inflation and extraordinary price increases specific to the mining sector, Xstrata’s businesses (excluding the acquisitions made in 2006) achieved real cost savings of $56 million in 2006, in a very challenging environment. EBIT Variances $m Total EBIT 2005 statutory Sales price* Volumes Unit cost – real Unit cost – CPI inflation Unit cost – foreign exchange Unit cost – mining inflation Foreign currency hedging Other income and expenses Depreciation and amortisation (excluding foreign exchange) Acquisitions EBIT 2006 pro forma *Net of commodity price linked costs, treatment and refining charges 2,520 1,730 (138) 56 (162) 113 (112) (45) (179) (66) 4,623 8,340 Xstrata plc Annual Report 2006 | 45 Other income and expenses include significantly increased share option costs under IFRS due to the increase in Xstrata’s share price, which rose by 109% in 2006 on a post rights issue adjusted basis. In addition, EBIT in 2006 was impacted by the absence of $21 million of equity-accounted income from Xstrata’s 20% share in Falconbridge and the absence of gains on sales of assets included in the prior year. Average commodity prices Unit Average price 2006 Average price 2005 % change Australian FOB export coking* Australian FOB export semi-soft coking* Australian FOB export thermal coal* Colombian FOB export thermal coal* South African export thermal coal* Aluminium (LME cash average) Copper (LME cash average) Lead (LME cash average) Zinc (LME cash average) Nickel (LME cash average) Ferrochrome (Metal Bulletin) Ferrovanadium (Metal Bulletin) *Average received price $/t $/t $/t $/t $/t $/t $/t $/t $/t $/t ¢/lb $/kg 111.2 68.0 46.4 49.3 45.8 2,570 6,740 1,286 3,264 24,155 71.6 38.5 111.5 70.3 51.2 – 48.5 1,898 3,684 976 1,382 14,747 73 70.5 (0.3) (3.3) (9.4) – (5.6) 35.4 83.0 31.8 136.2 63.8 (1.9) (45.4) In 2006, base metals prices were considerably stronger than in 2005. Copper prices reached a high of $8,800 per tonne in May 2006 and remained strong throughout the year. Nickel prices repeatedly reached new historical highs due to strong demand and critically low stocks, and this trend has continued into 2007. Zinc prices also significantly outstripped the previous year’s averages, increasing in the second half of the year as stocks fell and demand remained strong. Received export thermal coal prices were marginally lower than the prior year, but remained well above long run average prices and have rebounded strongly in early 2007. Coking coal prices remained at a similar level to 2005, albeit with greater price differential between high quality hard coking coal, such as Xstrata’s Oaky Creek product, and lower grade semi-soft coal. Average ferrochrome prices were lower year-on-year, but robust demand for stainless steel from the second quarter supported price increases throughout the year, with ferrochrome prices ending 2006 at 78¢ per pound. Whilst ferrovanadium prices dropped substantially from their peaks of early 2005, prices remain above historical levels. Currency Table to $ (USD) USD:ARS AUD:USD USD:CAD USD:CHF EUR:USD GBP:USD USD:ZAR Average 2006 Average 2005 % change (+/-) At 31.12.06 At 31.12.05 3.07 0.75 1.13 1.25 1.26 1.84 6.77 2.92 0.76 1.21 1.25 1.24 1.82 6.37 (5) (1) (7) – 2 1 (6) 3.06 0.79 1.17 1.22 1.32 1.96 7.00 3.03 0.73 1.16 1.31 1.18 1.72 6.33 The stronger US dollar against most of the local currencies in Xstrata’s operating regions during 2006 gave rise to a favourable variance to EBIT of $113 million, offset partially by the impact of Australian dollar hedging in respect of contracted coal sales which reduced by $45 million compared to the prior period. The greatest impact of the stronger US dollar was seen in South Africa, where the average South African rand exchange rate was 6% weaker against the US dollar compared to 2005. 46 | Xstrata plc Annual Report 2006 Financial Review Earnings Summary $m Pro forma year ended 31.12.06 Pro forma year ended 31.12.05 EBIT Net interest (excluding loan issue costs written-off and realised net foreign currency translation gains) Income tax expense Minority interests Attributable profit (before exceptionals) Earnings per share (before exceptionals)* WMC offer costs Loan issue costs written-off Gains and losses on foreign currency loans and net recycled gains/(losses) from foreign currency translation reserve Income tax on exceptionals Profit on sale of investments and operations Attributable profit Earnings per share* *Calculated using shares in issue on 31.12.06 8,340 (1,055) (2,127) (413) 4,745 513¢ – (9) 75 (5) 79 140 4,885 528¢ 3,932 (797) (733) (226) 2,176 252¢ (10) (17) 62 8 13 56 2,232 258¢ The effective tax rate for the period was 29% compared to 23% for the year ended 31 December 2005 due to increased earnings in higher tax jurisdictions and benefits from the change of tax rates in 2005. Minority interests rose steeply due to increased profitability at Alumbrera during the period. Statutory net interest before exceptional items increased from $92 million to $534 million, reflecting the higher levels of borrowings as a result of the Falconbridge acquisition. The statutory tax charge before exceptional items of $1,574 million represents an effective rate of 29% against 23% for 2005. The increase in 2006 is mainly due to the higher effective tax rates of the acquired Falconbridge operations and increased profitability in higher rate tax jurisdictions. Statutory attributable profit before exceptional items doubled, increasing by $1,690 million to $3,350 million. Xstrata plc Annual Report 2006 | 47 EBIT sensitivities $m Impact on 2007 EBIT* Indicative full year EBIT** 1¢/lb movement in ferrochrome price $1/kg movement in ferrovanadium price $1/tonne movement in Australian thermal export FOB coal price $1/tonne movement in Australian coking export FOB coal price $1/tonne movement in Colombian export thermal FOB coal price† $1/tonne movement in South African export thermal FOB coal price 1¢/lb movement in aluminium price 1¢/lb movement in copper price $10/oz movement in gold price $1/lb movement in nickel price $1/lb movement in ferronickel price 1¢/lb movement in zinc price $100/tonne movement in zinc treatment charge price 1¢/lb movement in lead price 10% 10% 10% 10% 10% 10% movement movement movement movement movement movement ARS AUD CAD EUR GBP ZAR 11 3 16 3 – 5 5 21 17 132 62 21 6 7 7 292 144 30 1 132 11 3 35 6 – 14 5 21 17 132 62 21 19 7 7 301 144 30 1 132 *After impact of currency and commodity hedging, and contracted, priced sales as at 31 December 2006 **Assuming current annualised production and sales profiles, no currency or commodity hedging and no contracted, priced sales and purchases at 31 December 2006 †Not available due to confidentiality provisions within shareholder agreements Dragline at ATCOM colliery, South Africa Community bakery training course, Challhuahuacho, Las Bambas exploration project Operator cleaning the boiler at Nordenham zinc smelter, Germany 48 | Xstrata plc Annual Report 2006 Financial Review Cash flow, net debt and financing summary $m Pro forma year ended 31.12.06 Statutory year ended 31.12.05 EBITDA Share of results from associates Increase in inventories Increase in trade and other receivables Increase in deferred stripping and other assets Increase in trade and other payables Movement in provisions and other non-cash items Cash generated from operations Net interest paid Dividends received Tax paid Cash flow before capital expenditure Sustaining capital expenditure Disposals of fixed assets Free cash flow Expansionary capital expenditure Cash flow before acquisitions Purchase and sale of investments Purchase of subsidiaries net of cash acquired Purchase of Cerrejón Sale of operations, net of cash disposed Net cash flow before financing Purchase of own shares Sale and issue of own shares Equity dividends paid Dividends paid to minority interests Redemption of minority interests Debt (acquired)/disposed of with operations Issue of convertible debenture Redemption of convertible debenture Convertible bond IAS 32/39 movements Other non-cash movements Movement in net debt Net debt at the start of the year Net debt at the end of the period* *Includes 100% of Alumbrera cash and third party shareholder loans 10,441 (11) (811) (633) (154) 534 4 9,370 (965) 2 (1,486) 6,921 (893) 32 6,060 (1,163) 4,897 (3) (17,078) (1,715) 24 (13,875) (11) 7,871 (496) (202) (95) (4,642) – 359 – 101 (10,990) (2,611) (13,601) 3,103 (23) (125) (334) (80) 236 3 2,780 (92) 17 (380) 2,325 (412) 11 1,924 (455) 1,469 (1,472) (60) – 25 (38) (522) 25 (154) (148) – 7 (375) – 120 (54) (1,139) (1,472) (2,611) The cash flow statement above compares statutory 2005 with pro forma 2006 cash movement, including the acquisitions of Falconbridge, Cerrejón and Tintaya from 1 January 2006, to provide a basis for comparison between the prior year and 2006 performance. On a pro forma basis, the Group generated $9.4 billion of operating cash flow during the period. After funding sustaining capital expenditure of $893 million, the operations generated some $6 billion of free cash flow. On a statutory basis, cash generated from operations increased by 141% from $2.8 billion to $6.7 billion. Xstrata plc Annual Report 2006 | 49 During the period, $386 million of Xstrata’s convertible debentures were converted to equity. As at 5 March 2007, less than $15 million of convertible debentures remained outstanding. Acquisitions In the first half of 2006, Xstrata made two major acquisitions at a total value of $2.5 billion. On 20 April, the Xstrata coal business acquired a one third share of the Cerrejón thermal coal business for $1.7 billion. The acquisition of the Tintaya copper mine in Peru was completed on 21 June 2006 at a cost of $811 million, net of cash acquired. In the second half of 2006, Xstrata acquired the remaining 80% of Falconbridge it did not already own, at a cost of $17.1 billion. Xstrata assumed control of Falconbridge on 15 August and completed the purchase of the remaining outstanding shares on 1 November 2006. The purchase of a 20% stake in August 2005 for $1.7 billion brought the total acquisition cost to $18.8 billion or C$56.44 per share. This acquisition has transformed Xstrata, bringing with it a suite of organic growth opportunities, diversification into nickel and aluminium, exposure to North America and a significantly enhanced South American copper business, together with additional scale for the zinc business, now the largest listed producer globally. Funding and Capital Structure Xstrata was transformed in 2006. During the year the Group financed three major acquisitions at a total cost of $19.6 billion. These acquisitions were financed through a combination of operational cash flows, debt and issued equity, maintaining Xstrata’s investment grade credit rating throughout. On 17 May 2006, the day that Xstrata announced its offer for Falconbridge, Xstrata placed 62 million shares in the market at a price of £21.00 per share, raising $2.5 billion – slightly in excess of the combined purchase price for the acquisitions of Cerrejón and Tintaya that were concluded earlier in the period. The placement comprised 32.5 million new shares and 29.5 million shares that were previously held by Batiss Investments under Xstrata’s Equity Capital Management Programme. The shares held by Batiss had been acquired over time in the market at an average price of £10.72 per share, resulting in a gain of $549 million, recognised directly in equity. The Group’s subsequent acquisition of Falconbridge in August 2006 was funded through a $19 billion financing package. This package was split equally between acquisition debt of $9.5 billion and bridging facilities of $9.5 billion. The acquisition further enhanced the Group’s risk profile through increased diversification by commodity, currency and geographic spread, together with increased scale and an exceptional suite of cash generative assets. Xstrata’s existing credit rating of BBB+ (stable) was reaffirmed by Standard & Poor’s following completion of the transaction and Moody’s commenced coverage of the group with a Baa2 (stable) rating, confirming Xstrata’s investment grade balance sheet and strong financial outlook. In October, a successful equity rights issue was completed to raise $5.5 billion, with the proceeds used to repay a portion of the $9.5 billion bridging facilities put in place at the time of the acquisition. The balance of these facilities was repaid prior to year end, through strong free operating cash flow from operations, together with the proceeds of an inaugural US global bond offering, which was heavily oversubscribed and raised $2.25 billion in November 2006. Total equity issuance during the year of $8 billion underlines Xstrata’s commitment to maintain an investment grade credit rating through a conservative capital structure. Despite undertaking three large acquisitions, funding all capital expenditure programmes and increasing dividend distributions, the Group remains well positioned to take advantage of its many internal growth options and to pursue value-adding external growth opportunities as they arise. From a pro forma net debt position at 30 June 2006 of $16.1 billion, Xstrata’s robust free cash flow generation has enabled net debt to decrease to $13.6 billion at year end. Net debt to equity (calculated as net debt to net debt plus equity) has correspondingly decreased from 47% to 41% over the same period. 50 | Xstrata plc Annual Report 2006 Financial Review Net debt summary The net indebtedness figures and working capital tables below are shown on a statutory basis. The debt position at 31 December 2005 is therefore that of the Group excluding the Falconbridge operations. The debt figures for 31 December 2006 include the impact of additional debt raising for the purchase of Falconbridge, net of substantial debt repayments from strong cash generation in 2006. Net debt summary $m As at 31.12.06 As at 31.12.05 Cash (excluding overdrafts) External borrowings Arrangement fees Finance leases Net debt* Net debt to net debt plus equity By currency: AUD CAD EUR GBP USD ZAR Other Net debt by currency *Includes 100% of Alumbrera cash 1,860 (15,303) 84 (242) (13,601) 40.8% (108) (435) 10 12 (12,984) (109) 13 (13,601) 524 (2,917) 11 (229) (2,611) 24.3% 35 – 8 10 (2,664) (4) 4 (2,611) Working capital $m As at 31.12.06 As at 31.12.05 Inventories Trade and other receivables Prepayments Trade and other payables Net working capital 3,540 2,826 204 (3,110) 3,460 891 1,138 99 (946) 1,182 The differences between the working capital balances above and the movements shown in the EBITDA cash flow reconciliation reflect non-cash items such as movements in exchange rates and non-current assets, including deferred stripping. The three major acquisitions resulted in a material increase in trade receivables, inventories and trade payables. Trade receivables increased further as metals sales prices rallied over the period. Inventories on hand at year end were also higher due to the higher cost of European smelter feedstock. Xstrata plc Annual Report 2006 | 51 Treasury Management and Financial Instruments The Group is generally exposed to US dollars through its revenue stream. The Group will seek to source debt capital in US dollars directly or by borrowing in other currencies and swapping them into US dollars, thus matching the negative exposure of debt service obligations against the positive exposure of revenue. Currency Hedging Currency cash flow hedging may be used to reduce the Group’s short-term exposure to fluctuations in the local currency exchange rates to the US dollar, Sterling and Euro. Net currency hedging gains amounted to less than $1 million in the income statement for the period ended 31 December 2006, compared to gains of $45 million for the corresponding period in 2005. The unrealised mark-to-market gain for currency hedging maturing in 2007 as at 31 December 2006 was $7 million. Australian dollar hedging is applied in respect of US dollar priced coal sales. Foreign currency forward contracts impacting 2007 earnings Currencies Forward sale $m 31.12.06 Weighted average exchange rate Fair value $m 31.12.05 Maturing 2007 $ to AUD $ to CAD $ to JPY EUR to ZAR $ to EUR Total 143 4 9 3 19 178 0.7550 1.5290 108.38 7.9685 1.3125 6 1 (1) 0 0 6 Commodity Hedging Cash flow hedges relating to sales in 2007 are shown in the table below. The fair value of these hedges is deferred within equity on the balance sheet until the sale is recorded. The unrealised mark-to-market loss on commodity hedging maturing in 2007 at 31 December 2006 was $54 million, based on the forward curve at that date. No new hedging contracts were entered into for base metals during 2006. Commodity forward and option contracts impacting 2007 earnings Commodity Volume Average price $ Fair value $m 31.12.06 Thermal coal (tonnes) Gold (ounces) Gold forwards (ounces) Gold collars (ounces) Total $ Coal AUD Gold $ Gold $ Gold 5,185,000 88,500 104,166 102,000 53.5 559.62 386.3 500-595 (12) (7) (27) (8) (54) *The average price is stated in US dollars and where necessary has been converted from foreign currencies at period end exchange rates 52 | Xstrata plc Annual Report 2006 Financial Review Construction of the new Nickel Rim South project in Sudbury, Canada Interest Rate Hedging The Group normally borrows and invests at floating rates of interest and will generally swap any fixed rate exposure into floating interest rates. A limited amount of fixed rate hedging may be undertaken during periods where the Group’s exposure to movements in short-term interest rates is more significant. The unrealised mark-to-market loss on interest rate hedging in place at 31 December 2006 was $16 million. Interest rate swaps Principal $m Average rate % Fair value $m 31.12.06 Interest rate swapped from US$ fixed rates Maturing between 1 to 2 years Maturing between 3 to 4 years Maturing between 4 to 5 years Maturing greater than 5 years Interest rate swapped to US$ fixed rates Maturing between 1 to 2 years Maturing greater than 5 years 111 600 1,050 1,750 25 100 3,636 8.48 4.50 5.69 6.30 5.00 4.54 5.84 6 (11) (1) (12) – 2 (16) Xstrata plc Annual Report 2006 | 53 Capital expenditure summary (excludes deferred stripping expenditure) $m Pro forma year ended 31.12.06 Pro forma year ended 31.12.05 Alloys Aluminium Coal Copper Nickel Zinc Technology Unallocated Total Sustaining Attributable Sustaining Alloys Aluminium Coal Copper Nickel Zinc Technology Unallocated Total Expansionary Attributable Expansionary Alloys Aluminium Coal Copper Nickel Zinc Technology Unallocated Total Attributable total 40 33 235 257 162 114 1 5 847 826 220 22 295 257 210 158 1 – 1,163 1,149 260 55 530 514 372 272 2 5 2,010 1,975 35 42 226 246 162 94 1 5 811 797 168 14 292 178 205 47 – 33 937 932 203 56 518 424 367 141 1 38 1,748 1,729 Expansionary capital expenditure increased in 2006, exceeding $1.1 billion on a pro forma basis as investments were made in a number of growth projects. Expansionary capital expenditure for Xstrata on a standalone basis (excluding Falconbridge) rose to $485 million, broadly in line with the guidance given last year of approximately $500 million. Major items of expansionary capital expenditure included the Project Lion ferrochrome smelter in South Africa, continued development of the Mototolo PGM project (a joint venture with Anglo Platinum and Kagiso Trust Investments), Goedgevonden thermal coal, ongoing expansions to the copper smelter and zinc-lead concentrator at Mount Isa, a new coal wash plant at Collinsville coal mine and the acquisition of a further dragline at the Rolleston operation in Queensland. The acquisition of Falconbridge brought with it a significant number of high quality projects undergoing development or feasibility studies. 54 | Xstrata plc Annual Report 2006 Financial Review In 2006, expenditure on expansionary nickel projects was in excess of $200 million. Funds were invested in the further development of the Nickel Rim South Project in Sudbury, which is scheduled to commence production in 2009, the renewal project underway at the Koniambo deposit in New Caledonia and an expanded drilling programme at the Kabanga project in Tanzania. Investment in former Falconbridge copper expansionary projects rose to over $173 million in 2006. Major items of expenditure included the completion of the Kidd Mine D expansion in Canada and further development of a number of growth projects including El Pachón, El Morro and Frieda River. Dividends The Directors have proposed a 2006 final dividend of 30¢ per share, amounting to $281 million. On a rights issue-adjusted basis, which takes into account the bonus element of the discounted rights issue, this amounts to a full year dividend of 41.6¢ per share, a 37% increase on the comparable 2005 rights issue-adjusted figure. The final dividend will be paid on 18 May to shareholders on the register at 27 April 2007. Dividend dates Ex-dividend date Deadline for return of currency election forms Record date AGM Applicable exchange rate date Payment date 2007 25 April 27 April 27 April 8 May 11 May 18 May As Xstrata plc is a Swiss tax resident company, the dividend payment will be taxed at source in Switzerland at the rate of 35%. A full or partial refund of this tax may be available in certain circumstances. The final dividend is declared and will be paid in US dollars. Shareholders may elect to receive this dividend in Sterling, Euros or Swiss francs. The Sterling, Euro or Swiss francs amount payable will be determined by reference to the exchange rates applicable to the US dollar seven days prior to the dividend payment date. Dividends can be paid directly into a UK bank or building society account to shareholders who elect for their dividend to be paid in Sterling. Further details regarding tax refunds on dividend payment, together with currency election and dividend mandate forms, are available from the investor relations section of Xstrata’s website (www.xstrata.com) or from the Company’s Registrars. Lydenburg ferrochrome smelter, South Africa Kidd creek copper operations, Ontario, Canada Operator at Nordenham zinc smelter, Germany Xstrata plc Annual Report 2006 | 55 Share Data Under IFRS, own shares (treasury stock) are deducted from the total issued share capital when calculating earnings per share. During the period, 2.5 million shares were sold in the market and 3 million shares were issued relating to the disposal of Xstrata equity allotted to an Employee Share Ownership Trust, (an employees’ share scheme as that term is defined for the purposes of the Companies Act 1985 and within the provisions), to service the exercise of employee share options. Share price Closing price 31.12.05 Closing price 31.12.06* Period high Period low Period average *Share price adjusted for rights issue in October 2006 XTA LSE (GBP) XTA SWX (CHF) 13.60 25.50 25.70 12.19 18.82 30.75 61.20 62.00 27.75 43.58 Shares in issue for statutory EPS calculations 2006 Weighted average for year ended 31.12.06 used for statutory eps calculation 2005 Weighted average for year ended 31.12.05 used for statutory eps calculation Total issued share capital as at 31.12.06 Number of shares (000s) 771,820 684,196 943,150 Equity Capital Management Programme Under the equity capital management programme (ECMP), up to 10% of the issued capital of Xstrata plc can be purchased in the market by Batiss Investments, a Guernsey-registered entity owned by a trust and legally independent of the Xstrata Group. During the first half, 29.5 million shares held by the trust were sold at an average price of £21.00 per share with the gain of $549 million taken directly to the Group’s reserves. No shares were purchased under the ECMP during the period, and no shares are held in the trust at 31 December 2006. Publicly disclosed major shareholders Name of shareholder Number of ordinary shares of $0.50 each % of ordinary issued share capital Glencore International AG 336,801,333 34.7 The Capital Management Arrangement between Glencore and Credit Suisse Group, which was entered into in connection with the Xstrata Group’s acquisition of MIM Holdings Limited and the associated rights issue in 2003, was terminated on 20 December 2006. Operational Review Growth Performance Xstrata plc Annual Report 2006 | 57 Revenue for 2006 was 6% lower than in 2005, predominantly driven by weaker market and pricing conditions in the first quarter. Market conditions alloys resulted in the suspension of production at a total of seven furnaces for varying periods of time. Routine maintenance stoppages also occurred at a number of other furnaces during the South African winter months. Four furnaces remained suspended at the end of 2006, two of which have been returned to production in the first quarter of 2007. XA Chrome | Operations with cost savings contributing $8 million to EBIT. Efficiencies were achieved through more stable reductant prices, improved metallurgical performance and sound energy management. The full commissioning of the Lion plant in 2007 is expected to have a significant positive impact on unit operating costs, primarily due to increased energy efficiency from Xstrata’s Premus technology. Attributable saleable production of 958,600 tonnes of ferrochrome was 15% lower than in the previous year, although stockpiled material was used to supplement sales volumes, which were only marginally lower than in the previous year. Improved availability of quality ores resulted in improved metallurgical efficiencies in the furnaces, particularly in the Western operations. EBIT decreased by 17% year on year, due to lower average prices and standing charges associated with idled capacity, together with the impact of ongoing mining sector inflation. From 1 July 2006, Merafe’s interest in the Xstrata-Merafe Chrome Venture increased to 20.5%. In real terms, excluding standing charges, operating costs were contained in 2006, Developments The new Lion ferrochrome smelting complex was commissioned on schedule and within budget in the third quarter of 2006. The plant’s design criteria was met within the first three months of operation, and full commissioning remains on track for completion in the second quarter of 2007. The Bokamoso pelletising project remains within budget and commissioning is due to begin in the second quarter of 2007. Construction started in May 2006 and good progress was made despite unfavourable ground conditions that necessitated significant additional blasting. Construction of the 6,000m2 covered sinter building is completed, assisting Financial and Operating Data: Chrome $m Year ended 31.12.06 Year ended 31.12.05 Revenue EBITDA Depreciation & amortisation EBIT Share of Group EBIT Net assets Capital employed ROCE Capital expenditure Sustaining Expansionary 748 141 (23) 118 1.4% 898 902 12.6% 197 36 161 798 169 (27) 142 3.6% 726 851 17% 187 26 161 58 | Xstrata plc Annual Report 2006 Operational Review | Alloys EBIT variances: Chrome EBIT 31.12.05 Sales price* Volumes Unit cost – real Unit cost – inflation Unit cost – currency Other income and expenses Depreciation and amortisation (excluding foreign exchange) EBIT 31.12.06 *Net of commodity price linked costs $m 142 (23) (2) 8 (35) 34 (7) 1 118 equipment installation during the wet summer season, and the civil works remain on schedule. Vanadium | Operations Revenue decreased by 37% to $199 million while EBIT decreased by 40% to $105 million. While sales volumes of vanadium pentoxide and ferrovanadium increased by 177 and 206 tonnes respectively compared to 2005, profitability was impacted by lower sales prices for both vanadium pentoxide and ferrovanadium, 55% and 34% lower respectively than the record highs of 2005. During 2006, a number of projects were successfully completed to increase production capacity by approximately 7% year-on-year, and to continue Rhovan’s programme of continuous environmental improvements. These included increased electrical supply and process flow optimization, and the commissioning of additional air pollution control equipment and dust suppression for the slimes dam. Vanadium-rich spinel was successfully introduced into Rhovan’s production process during 2006. This increased production by approximately 40 tonnes per month. The associated increase in production costs was more than offset by the higher production volumes and premiums received. This strategy will continue in 2007, to maximise production and margins. Developments In January 2007, Xstrata Alloys and the Bakwena Ba Mogopa Traditional Community announced a ZAR575 million Black Economic Empowerment (BEE) transaction in respect of Xstrata’s Rhovan vanadium facility. The Bakwena community is the surface owner of the property on which Rhovan is located, and will have an effective 26% participation in the EBITDA generated by Xstrata’s vanadium business through a Pooling and Sharing Venture, similar to the XstrataMerafe Chrome Venture. The Bakwena community is also able to participate in any expansion of Rhovan on competitive terms. The transaction, which is expected to be completed in the first half of 2007, completes the facilitation of meaningful black participation in Xstrata’s South African operations, according to the ownership provisions of the Mineral and Petroleum Resources Development Act of 2002 (MPRDA). Marifaan primary school is one of several schools built by Xstrata in South Africa Xstrata plc Annual Report 2006 | 59 Planning for a brownfield expansion at the Rhovan vanadium plant, which will increase plant capacity by an additional 8.5 million pounds of vanadium pentoxide per annum, is at an advanced stage. Regulatory requirements for any future expansion, including approvals under the MPRDA, will be obtained during this process. A capital application is expected to be made to the Xstrata Board during 2007. Rehabilitation of the Vantech site, adjacent to Xstrata Alloys’ Lion operation, is progressing well and remains on track for completion in 2011. Platinum Group Metals | Operations The commissioning of the Mototolo Concentrator during October 2006 as anticipated marked the formal entry by Xstrata into platinum group metals. The first concentrate was delivered to Anglo Platinum’s Polokwane smelter towards the end of October 2006. Steady state production for the concentrator is anticipated from February 2007 when design capacity of approximately 200,000 tonnes of run of mine material will be milled and processed. Both Borwa and Lebowa shafts will reach steady state production of approximately 100,000 run Behavioural safety training at Xstrata Alloys Financial and Operating Data: Vanadium $m Year ended 31.12.06 Year ended 31.12.05 Revenue EBITDA Depreciation & amortisation EBIT Share of Group EBIT Net assets Capital employed ROCE Capital expenditure Sustaining Expansionary 199 111 (6) 105 1.3% 146 146 69.5% 5 4 1 318 181 (6) 175 4.5% 128 129 137.5% 16 9 7 EBIT variances: Vanadium EBIT 31.12.05 Sales price* Volumes Unit cost – real Unit cost – CPI inflation Unit cost – foreign exchange Other income and expenses Depreciation and amortisation (excluding foreign exchange) EBIT 31.12.06 *Net of commodity price linked costs $m 175 (97) 9 7 (7) 6 13 (1) 105 60 | Xstrata plc Annual Report 2006 Operational Review | Alloys Financial and Operating Data: Platinum Group Metals $m Year ended 31.12.06 Year ended 31.12.05 Revenue EBITDA EBIT Share of Group EBIT Net assets Capital employed Capital expenditure Expansionary 12 11 11 0.1% 71 71 58 58 n/a n/a n/a n/a n/a n/a – – of mine tonnes per month during the third quarter of 2007. The early geological problems encountered last year have been fully addressed and the project remains on budget. In February 2006, Xstrata announced the formation of a black economic empowerment partnership with Kagiso Trust Investments, through which Kagiso has taken a 26% share of Xstrata’s 50% interest in the Mototolo joint venture. This has resulted in Kagiso owning a fully participative 13% interest in the earnings from the Mototolo operation, in return for funding its proportionate share of the total capital expenditure required for the project. Tapping the furnace at the Lion ferrochrome smelter Xstrata plc Annual Report 2006 | 61 Xstrata Aluminum comprises the St Ann bauxite mine in Jamaica and the Gramercy alumina plant, both of which are 50% owned through aluminum a joint venture with Century Aluminum Company, the New Madrid primary smelter, supplied by the Gramercy alumina plant, and four rolling mills in the south-eastern United States, capable of producing a range of fabricated products. XAl Operations added products such as billet, electrical conductor rods and foundry alloys were 5% higher in 2006, adding $11 million to EBIT. The fabricated products business increased production of rolled aluminium by 8% to 215,000 tonnes in 2006. The new 905 caster at Norandal, installed January 2006, increased cast coil production capacity by 9% and was the main driver of increased third-party sales, up by 4% year-on-year. Xstrata Aluminum EBIT more than doubled compared to 2005 on a pro forma basis to $208 million, as higher prices and increased volumes more than offset increased natural gas costs and higher power costs at the New Madrid primary smelter. Operating unit costs benefited from energy efficiency programmes at the New Madrid primary smelter, where a 1% reduction in kilowatt hours required to generate aluminium metal was achieved, partially offsetting a $5 million increase in power costs due to a new power contract effective June 2005. Revenue for 2006 rose by 29% compared to the previous year, largely due to higher aluminium and fabrication prices and record production and sales volumes, driven by strong customer demand. At the St Ann mining operation in Jamaica, production of bauxite increased by 31% to 5 million tonnes (of which Xstrata’s attributable share is 50%), but heavy rains during the fourth quarter created logistical constraints on vessels used to deliver bauxite to the Gramercy alumina plant. As a result, production of smelter grade alumina at Gramercy remained constant with 2005 levels of 1 million tonnes. Production of refined aluminium metal increased by 3% year-on-year at the New Madrid smelter, and record sales of value- Consolidated Financial and Operating Data: Aluminium $m Pro forma year ended 31.12.06 Pro forma year ended 31.12.05 Revenue EBITDA Depreciation & amortisation EBIT Share of Group EBIT Net assets Capital Employed ROCE Capital expenditure Sustaining Expansionary 1,395 286 (78) 208 2.5% 1,313 1,313 15.8% 55 33 22 1,080 158 (83) 75 1.9% n/a n/a n/a 56 42 14 62 | Xstrata plc Annual Report 2006 Operational Review | Aluminium Sales volumes: Aluminium kt Year ended 31.12.06 Year ended 31.12.05 Jamaica – St. Ann mine* Inter-company bauxite sales Third party bauxite sales United States – Gramercy refinery* Inter-company alumina sales Third party alumina sales United States – New Madrid Primary Plant Aluminum United States – Norandal USA, Inc. Aluminum rolled products Primary – Realised aluminum price ($/lb) Norandal – Average fabrication spread ($/lb of foil) *100% sales volumes of which Xstrata’s share is 50% 2,307.4 2,235.5 481.3 693.9 255.6 185.6 120.3 47.8 2,201.3 1,857.5 477.2 701.2 247.8 177.9 91.0 46.0 Unit costs also benefited from improved mill performance at Norandal due to increased throughput and cost improvement projects, especially energy conservation. Despite a natural gas price increase from $7.77 per dekatherm (Dth) in 2005 to $10.28 per Dth in 2006, the impact on conversion costs was offset by improvements in energy efficiencies. Conversion programmes at the Huntingdon plant combined to produce an 8% year-on-year reduction in energy consumption per pound of product. Norandal USA Inc. and the United Steelworkers agreed to a new three-year contract at the Salisbury Plant in November 2006. The union membership ratified the contract on 20 November 2006, which runs to 20 November 2009. Developments The New Madrid primary smelter is currently progressing four projects at a cost of $22 million to achieve improved energy efficiency and increase metal production by 10,000 tonnes per annum by 2011. Port facilities at St. Ann bauxite mine, Jamaica Xstrata plc Annual Report 2006 | 63 Increased volumes across the business contributed $115 million to EBIT and enabled consolidated sales to grow by 7% in 2006. Production volumes and coal sales increased as a result of capital projects to improve existing operations and the commissioning and ramping up of new projects. XC Operations In addition, in March 2006 Xstrata Coal announced the acquisition of a one-third interest in Cerrejón in Colombia, one of the world’s largest open-pit coal mines. This acquisition contributed $153 million to EBIT in 2006, on a pro forma basis. Together, increased volumes and the contribution of Cerrejón more than offset the impact of lower received prices for thermal coal and, to a lesser extent, semisoft coking coal compared to the prior year, which impacted EBIT by $231 million. Overall, EBIT fell by 25% to $937 million, due to the impact of lower sales prices and ongoing increases in prices for key mining materials, in addition to consumer price index inflation. In particular, the mining industry continues to be heavily affected by increasing costs for labour, fuel and explosives. Nonetheless, increased volumes at existing operations, the commissioning of new projects and the ramping up of the Rolleston coal mine, commissioned in April 2006, enabled the business to contain real unit costs at a similar level to the prior year. Despite South Africa’s increased costs year-on-year, real unit costs remained flat due to improved unit costs in Australia, primarily from coking coal. Australian thermal coal Consolidated saleable production in 2006 rose to 41 million tonnes, an increase of 7% compared to the previous year, however lower average thermal coal prices and the impact of coal mining sector inflation resulted in EBIT falling by 34% to $436 million. Export sales increased by 1.3 million tonnes over 2005 and domestic sales of thermal coal increased by 2.6 million tonnes, the latter assisted by the commencement of the Ravensworth West domestic dragline operation in New South Dragline at Bulga thermal coal operation, Australia 64 | Xstrata plc Annual Report 2006 Operational Review | Coal Financial and Operating Data: Coal $m Pro forma year ended 31.12.06** Pro forma year ended 31.12.05** Revenue: operations† Coking Australia Thermal Australia Thermal South Africa Thermal Americas Revenue: other Thermal Australia Thermal South Africa Total revenue Coking Australia Thermal Australia Thermal South Africa Thermal Americas EBITDA Coking Australia Thermal Australia Thermal South Africa Thermal Americas Depreciation & amortisation Coking Australia Thermal Australia Thermal South Africa Thermal Americas EBIT (before exceptionals) Coking Australia Thermal Australia Thermal South Africa Thermal Americas Net assets Australia South Africa Americas Capital employed Australia South Africa Americas Share of Group EBIT Australia South Africa Americas Return on capital employed* Australia South Africa Americas Capital expenditure Australia South Africa Americas Sustaining Expansionary †Includes purchased coal for blending with mine production *ROCE % based on average exchange rates for the period **Pro forma including Cerrejón acquisition from 01.01.06 and 01.01.05 for 2006 and 2005 respectively 3,626 598 1,887 688 453 131 105 26 3,757 598 1,992 714 453 1,320 300 622 175 223 (383) (50) (186) (77) (70) 937 250 436 98 153 6,342 3,269 1,299 1,774 6,709 3,497 1,438 1,774 11.2% 8.2% 1.2% 1.8% 14.2% 20.5% 6.6% 8.6% 530 307 159 64 235 295 3,649 537 1,935 736 441 192 138 54 3,841 537 2,073 790 441 1,588 278 812 256 242 (332) (34) (155) (78) (65) 1,256 244 657 178 177 n/a n/a n/a n/a n/a n/a n/a n/a 31.9% 22.9% 4.5% 4.5% n/a n/a n/a n/a 518 404 65 49 226 292 Xstrata plc Annual Report 2006 | 65 Wales and the ramp-up of the Rolleston mine in Queensland. In February 2006, longwall production commenced at Newlands Northern Underground, replacing production from the now closed Southern Underground. The full ramp up of Rolleston resulted in achieving its planned production level of five million tonnes for the first full year of operation. Export growth was primarily driven by the Rolleston operation, offsetting decreases in other operations. After excluding the impact of coal mining sector inflation and revenue-related costs (primarily Government royalties), and despite increased demurrage at the port of Newcastle particularly during the last quarter of the year, real unit cost savings were again achieved in 2006, following on from savings in the two previous years. Australian coking coal Production from Xstrata’s coking coal business increased by 15% in 2006, reaching 5.6 million tonnes, with sales volumes increasing to 5.4 million tonnes. Increased volumes were primarily driven by new production from the low cost Wollombi deposit at Newlands which commenced production in June 2006, continued growth from the Oaky Creek underground operations and increased coking coal production from Collinsville. Production at the higher cost Oaky Creek open cut operation was curtailed in 2006, benefiting unit costs. Higher volumes, together with stable sales prices for premium hard coking coal, offset higher mining sector inflation to increase EBIT by 2% to $250 million in 2006. Excluding coal mining sector inflation and revenue-related costs, real unit cost savings were achieved in the coking coal business in 2006, largely as a result of increased productivity at the Oaky Creek underground operation and new lower cost production at Wollombi. South Africa Saleable production increased by 10% to 20.5 million tonnes in 2006, mainly due to additional domestic product from the Tweefontein complex and improved production across operations in the second half of the year. Export thermal coal sales were down slightly year on year (13.3 million tonnes compared to 13.5 million tonnes), due to difficult operating conditions, principally in the first half. These included the impact of high rainfall and difficult geological and mining conditions. Domestic thermal coal sales increased from 6.9 million tonnes in 2005 to 7.1 million tonnes in 2006. Significant increases in real unit costs in the first half due to difficult operating conditions were largely offset by productivity improvements in the second half, resulting in an overall real cost increase of 7% year-on-year, excluding the impact of mining sector inflation. Operator at the Rolleston coal mine, Australia Coking coal production increased by 15% in 2006 66 | Xstrata plc Annual Report 2006 Operational Review | Coal EBIT variances (pre exceptionals): Coal EBIT 31.12.05 (Statutory) Sales price* Volumes Unit cost – real Unit cost – coal mining sector inflation Unit cost – CPI inflation Unit cost – foreign exchange Foreign currency hedging Corporate social involvement Other income and expenses Depreciation and amortisation (excluding foreign exchange) Acquisitions EBIT 31.12.06 (Pro forma†) *Net of commodity price linked costs †Pro forma EBIT includes the acquisition of Cerrejón from 01.01.06 $m 1,079 (231) 115 (2) (34) (89) 59 (56) 2 (5) (54) 153 937 Americas On a pro-forma basis, Xstrata Coal’s one third interest in Cerrejón contributed 9.5 million tonnes of saleable product and $153 million to EBIT, slightly ahead of expectations made at the time of the acquisition. EBIT for 2006 fell by 14% or by $24 million compared to the prior year, due to slightly lower realised sales prices, compounded by the impact of inflation, predominantly as a result of rising global fuel prices. Cost pressures were partially offset by increased export sales volumes. Xstrata’s share of sales increased from 8.5 million tonnes to 9.2 million tonnes, in line with planned production expansion. In January 2007, a two-year collective agreement was signed with the Sintracarbón union at Cerrejón, with no labour disruptions. with the majority of expenditure incurred in Queensland. Key capital expenditure projects in 2006 included: I I I completion of Rolleston Coal mine (AUD67 million in 2006); replacement of the existing Newlands coal handling and preparation plant with a new dense medium cyclone plant, enabling the production of additional coking coal product (AUD48 million); the upgrade of the fines treatment circuit at Oaky Creek coal handling and preparation plant to increase recoveries of coking coal product (AUD9 million). Truck being loaded at Rolleston coal mine, Australia Developments Australia Capital expenditure for Xstrata Coal’s Australian operations decreased to AUD407 million ($307 million) in 2006, Conceptual studies were completed at Wandoan during the year, where the coal resource delineated to date comprises 1.13 billion tonnes of export potential thermal coal in the Surat Basin in Queensland. In addition, Xstrata Coal has taken a 25% interest in the Surat Basin Rail joint venture, a consortium comprising Queensland Rail, Anglo Coal, Australian Transport and Energy Corridor Pty Ltd, and Industry Funds Management. Xstrata plc Annual Report 2006 | 67 In December 2006, the Premier of Queensland awarded the joint venture consortium a Conditional Exclusive Mandate to develop a 210 kilometre rail link between Wandoan and Banana, allowing access for coal exports from the Surat Basin to the Port of Gladstone. In June 2006, Xstrata Coal announced the signing of a Heads of Agreement with Caledon Resources plc for the partial sale of its Cook Colliery for a purchase consideration of AUD46 million ($34 million). Located in Central Queensland’s Bowen Basin, Cook Colliery produces hard coking, semi-soft and thermal coal products primarily for the export market. The colliery’s operating company, Cook Resource Mining Pty Ltd (CRM), is owned by Xstrata Coal. Under the terms of the agreement, Caledon has been granted a sub-lease to mine the Southern region and accepts responsibility for the rehabilitation of the area. CRM retains exclusive ownership of the Northern Region for exploration. The transaction was completed in December 2006. South Africa In February 2006, Xstrata and African Rainbow Minerals Limited (ARM) announced an agreement to establish jointly a new, majority black-owned coal mining company, ARM Coal, owned 51% by ARM and 49% by Xstrata Coal. The new company has a 51% interest in the Goedgevonden joint venture. Following the direct acquisition of an additional 10% interest (excluding the Goedgevonden joint venture) by ARM in the South African coal business in August 2006, ARM now (directly and indirectly) holds a 30% interest in Xstrata’s South African coal business. This represents meaningful and sustainable black economic ownership and management involvement in Xstrata’s South African coal assets and provides a platform for further growth for both partners. ARM Coal has subsequently applied for Richards Bay Coal Terminal port entitlement to support the future development of the Goedgevonden mine. The Goedgevonden joint venture between Xstrata Coal South Africa and ARM Coal is a major new greenfield, open cut, thermal coal mine at a total investment of ZAR2.9 billion ($392 million). The project will commence upon receipt of the remaining new order mining lease rights. At full production, the Goedgevonden mine will produce 3.1 million tonnes per annum of export thermal coal and 3.6 million tonnes per annum suitable for the domestic thermal markets and will have a mine life in excess of 30 years. The mine is located in the Witbank coalfield, in the Mpumalanga province. Sarah Jeffrey, environmental graduate, conducts a flora survey at the Collinsville coal operations, Australia The mine will be developed through a majority black-owned joint venture, the “Goedgevonden JV”, in which ARM Coal owns a 51% share. Xstrata Coal South Africa owns the remaining 49%. ARM will appoint the majority of representatives on the Goedgevonden JV management committee, in line with its majority interest. Xstrata will manage the Goedgevonden Project on behalf of the Goedgevonden JV and Xstrata Coal Marketing AG will market all export coal produced by the mine. Capital expenditure in South Africa increased significantly by 145% compared to 2005 to ZAR1,079 million ($159 million), of which ZAR675 million was incurred on expansionary projects. 68 | Xstrata plc Annual Report 2006 Operational Review | Coal Major items included ZAR83 million on Southstock 5 seam development and ZAR68 million on initial works at the Goedgevonden open cut project. Expansionary capital expenditure also included the purchase of Total Coal South Africa’s 50% share of the ATC and ATCOM operations, in conjunction with a three-year supply agreement, announced in December 2006. The acquisition enables Xstrata Coal South Africa to mine a single large complex in the Witbank coalfields, benefiting from synergies across various Xstrata Coal sites. Americas In May 2006, Xstrata completed the acquisition of one-third of the Cerrejón thermal coal operation in Colombia from Jim Young at Oaky Creek underground coal mine, Australia Glencore International AG for a cash consideration of $1.7 billion. Cerrejón is a privately-owned, independently-managed joint venture in which BHP Billiton plc, Anglo American plc and Xstrata Coal each own a one-third stake. The acquisition has provided Xstrata Coal with a meaningful interest in one of the world's largest and lowest-cost export open-pit coal mines, with a reserve base in excess of 900 million tonnes. An expansion is under way to increase Cerrejón’s production from 26 million tonnes in 2005 to an annual production capacity of 32 million tonnes in 2008, with further incremental brownfield expansions currently being assessed. In February 2006, Xstrata Coal purchased a 9.8% interest in Erdene Gold, a Torontolisted junior Canadian exploration company with interests in Georgia, USA and Mongolia. The investment provides an option to acquire 75% of coal or other mineral tenements based on investing in exploration and feasibility activities in Mongolia. Xstrata Coal’s shareholding has been diluted to 6.6% in the past year, following a rights issue. During 2006, Xstrata Coal undertook exploration and pre-feasibility work on the Donkin coal resource in Nova Scotia, Canada. This included the acquisition of the Donkin lands, dewatering of two 3.7 kilometre tunnels that access the underground coal resource, resource assessments, mining assessments, and environmental studies at a capital cost of $4 million. Feasibility studies will continue throughout 2007. To manage these interests, a new divisional office has been established in Toronto, Canada. Xstrata plc Annual Report 2006 | 69 The highlight of the 2006 financial year has been the acquisition and integration of the Tintaya and Falconbridge copper assets within the Xstrata Copper business unit, contributing 74% or $2.7 billion to the business unit’s EBIT growth of $3.6 billion for the year. XCu copper Operations Xstrata Copper’s mined copper production more than doubled to over one million tonnes of contained metal, on a pro forma basis Pro forma average cash costs (C1) for the combined copper businesses were particularly impressive, showing a reduction from 57.6¢ per pound to 57.2¢ per pound over the corresponding period. The benefits of a favourable mix of byproduct credits and lower realisation costs helped to offset an increase in costs related to mining industry inflation. This mining sector inflation continued to exceed CPI inflation during the year, with significant pressures being experienced in the areas of labour, contractors, fuel and energy. Real unit cost performance for the pre-existing Xstrata Copper assets was affected by planned lower head grades at Ernest Henry, as well as a planned smelter re-brick in North Queensland. Asset capacity utilisation rates have been high, with improved operating efficiencies resulting in increased productivities in key assets. Of particular note were record ore production from the Mount Isa underground operations, record plant throughputs at Tintaya and strong asset utilisations across the Canadian assets. Xstrata Copper’s mined copper production profile more than doubled in 2006 to a pro forma total of over one million tonnes of contained metal, owing to the addition of the Falconbridge copper assets and the acquisition of the Tintaya operation in Peru. On a pro forma basis, total copper production of 1.01 million tonnes in 2006 was slightly lower than 1.02 million tonnes in 2005, as strong performances at Mount Isa, Kidd, Collahuasi, Lomas Bayas, Copper cathode production at CCR refinery in Canada Antamina and Tintaya were offset by grade-influenced lower output at Ernest Henry and Alumbrera more than offset a lower production year from Ernest Henry. Xstrata Copper’s mined gold production increased to 786,800 ounces of contained metal, in which a strong gold production performance at Alumbrera more than offset a lower production year from Ernest Henry. During the Falconbridge integration planning process, Xstrata Copper identified approximately $60 million of annual synergy benefits from the integration of the former Falconbridge copper assets. The progressive implementation of integration plans will see these benefits fully realised during 2007. In addition, a once-off finance re-structuring benefit of $58 million was achieved as a result of the copper asset integration. 70 | Xstrata plc Annual Report 2006 Operational Review | Copper Financial and Operating Data: Copper $m Pro forma year ended 31.12.06 Pro forma year ended 31.12.05 Revenue Argentina Alumbrera Australia North Queensland Canada* Chile Collahuasi** North Chile Peru Antamina‡ Tintaya Marketing and Trading EBITDA Argentina Alumbrera Australia North Queensland Canada* Chile Collahuasi** North Chile Peru Antamina‡ Tintaya Marketing, Trading & other Depreciation & amortisation Argentina Alumbrera Australia North Queensland Canada* Chile Collahuasi** North Chile Peru Antamina‡ Tintaya 12,508 1,457 1,635 4,560 1,320 1,780 989 735 32 5,399 1,025 1,089 561 967 429 796 508 32 (871) (100) (119) (130) (234) (79) (109) (98) 6,927 849 1,158 1,824 649 1,414 623 410 – 2,697 537 594 169 456 196 508 221 16 (845) (105) (106) (132) (234) (77) (109) (82) Xstrata plc Annual Report 2006 | 71 Financial and Operating Data: Copper (continued) $m Pro forma year ended 31.12.06 Pro forma year ended 31.12.05 EBIT Argentina Alumbrera Australia North Queensland Canada* Chile Collahuasi** North Chile Peru Antamina‡ Tintaya Marketing, Trading & other Share of Group EBIT Argentina Alumbrera Australia North Queensland Canada* Chile Collahuasi** North Chile Peru Antamina‡ Tintaya Marketing and Trading Net assets† Capital employed ROCE Capital expenditure Argentina Australia Canada* Chile Collahuasi** North Chile Peru Antamina‡ Tintaya and Others Sustaining Expansionary 4,528 915 970 431 733 350 687 410 32 54.3% 11.0% 11.0% 11.6% 11.6% 5.2% 13.0% 8.8% 4.2% 13.1% 8.2% 4.9% 0.4% 14,154 14,665 33.6% 514 55 180 128 26 88 8 29 257 257 1,852 432 488 37 222 119 399 139 16 47.1% 10.9% 10.9% 12.8% 12.8% 0.9% 8.6% 5.6% 3.0% 13.9% 10.5% 3.4% – n/a n/a n/a 424 43 116 140 31 49 18 27 246 178 †Includes goodwill allocation on acquisition of Falconbridge *Canada includes Noranda Recycling that operates businesses in Canada, the United States of America and Asia **Xstrata’s 44% share of Collahuasi ‡Xstrata Copper's pro rata share of Xstrata’s 33.75% interest in Antamina. Xstrata Copper’s share is determined by accounting for all product revenue, excluding zinc, offset by its pro rata share of costs which is determined on the basis of revenue earned as outlined above 72 | Xstrata plc Annual Report 2006 Operational Review | Copper Underground miner, David Beattie, prepares for his shift at Mount Isa Mines, Australia Underground mining at Kidd Creek copper mine, Canada The synergies identified through the integration of the Tintaya operation into Xstrata Copper Peru, of $110 million of additional value, have been confirmed and are being progressively realised. A further $50 million of value uplift has already been realised through ongoing operational management initiatives, with a range of other significant initiatives being actively pursued in 2007. Argentina Alumbrera Higher commodity prices and strong gold production increased revenues at Alumbrera by 72% compared to the previous year to $1.5 billion. EBIT rose by 114% to $915 million. Copper-in-concentrate production at Alumbrera was 4% lower than in the corresponding period, at 180,100 tonnes, due to lower head grades and metallurgical recoveries. This was compensated by a stronger gold production performance, which was 11% higher at 641,160 ounces, reflecting higher gold grades and improved metallurgical performance. Total material mined from the Alumbrera pit was slightly lower than the corresponding period at 112 million tonnes, in line with the plan. Copper concentrate sales decreased by 8% over 2005 to 170,200 tonnes, mainly due to a carry-over of sales into 2007. Total gold sales were 10% higher than 2005. Australia The North Queensland division achieved strong EBIT of $970 million in 2006, a significant increase of 92% over 2005. The stronger copper price was the main contributor to improved profitability, offset slightly by lower sales volumes, inflationary impacts and scheduled lower grade ore from the Ernest Henry operation. Overall, the North Queensland operations produced 278,100 tonnes of copper in concentrate in 2006, a decrease of 9% over 2005 production, as increased production from Mount Isa was offset by lower head grades and production levels at Ernest Henry. At the Mount Isa underground copper operations, important milestones were achieved during the period with full-year tonnages of ore hoisted and milled reaching 6.2 million tonnes and 6.1 million Xstrata plc Annual Report 2006 | 73 tonnes respectively, both representing new production records for Mount Isa. The increased ore production, 11% higher than in 2005, together with higher copper head grades of 3.42% compared to 3.36% in 2005, contributed to a record copper-in-concentrate production of 194,100 tonnes from Mount Isa, which was a 9% increase over 2005. At Ernest Henry, operating performance was significantly influenced by planned lower copper head grades at the mine, 27% lower at 0.89%. Continued improvements in the maintenance and operations plan for the concentrator resulted in record annualised plant runtime of 94% of total time, although the harder ore treated reduced throughputs by 10%. Overall Ernest Henry production was 35% lower than the previous year at 84,000 tonnes of copper in concentrate. Copper smelter production was 3% lower than in 2005, predominantly due to a planned month-long shutdown of the copper smelter in September 2006 to re-brick the ISASMELT furnace and to enable the commissioning of the second Rotary Holding Furnace. The Townsville copper refinery produced 209,200 tonnes of saleable cathode, 5% lower than in 2005, due to the lower anode supply from the Isa smelter. Canada Xstrata Copper Canada comprises the former Falconbridge assets of Kidd mining and metallurgical divisions, the Horne Smelter, the Canadian Copper Refinery (CCR) and Noranda Recycling. Strong copper prices and higher sales volumes from increased production boosted revenue by 150% to $4.6 billion and led to a significant increase in EBIT to $431 million in 2006 on a pro forma basis. At Kidd mine, ore production increased by 6% to 2.5 million tonnes as additional mining areas became available following the completion of the Mine D expansion project. Copper head grades rose slightly to 2.05% while zinc grades were 15% lower at 5.3%. The Kidd mill processed 2.6 million tonnes of ore from Kidd mine and a record 0.9 million tonnes of Montcalm coppernickel ore, up by 14% and 17% respectively compared to the prior year. Copper in concentrate production increased by 18% to 50,400 tonnes, while zinc in concentrate was 4% lower due to lower feed grades. The Kidd smelter produced 129,000 tonnes of blister copper, an improvement of 8% over 2005, when output was impacted by a strike. The Kidd copper refinery produced 127,900 tonnes of cathode, an improvement of 15% over 2005 due to increased ore production and no industrial action in 2006. The Horne smelter processed 843,200 tonnes of feed in 2006, an increase of 18% over 2005 and the highest volume processed since 1998. Anode production rose 26% to 185,000 tonnes compared to the previous year. Cathode output at the CCR refinery set a new production record of 368,300 tonnes, 21% higher than in 2005. Higher production rates at the Horne smelter, coupled with a new anode supply agreement with CVRD/Inco from its Sudbury operations contributed to the higher production rates. The refinery successfully demonstrated its capacity to process anodes that are high in nickel content. Cathode output at the CCR refinery set a new production record of 368,800 tonnes, 21% higher than in 2005 Sample analysis at CCR copper refinery, Canada 74 | Xstrata plc Annual Report 2006 Operational Review | Copper Sales volumes: Copper Pro forma year ended 31.12.06 Pro forma year ended 31.12.05 Argentina – Alumbrera† Copper in concentrate (t) inter-company (payable metal) Copper in concentrate (t) third-parties (payable metal) Total copper (t) (payable metal) Gold in concentrate (oz) (payable metal) Gold in doré (oz) (payable metal) Total gold (oz) (payable metal) Australia – North Queensland Refined copper (t) Copper in concentrate (t) (payable metal) Other products (payable metal) Total copper (t) (payable metal) Gold in concentrate and slimes (oz) (payable metal) Canada Refined copper – mined copper (t) Refined copper – inter-company sourced (t) Refined copper – third party sourced (t) Other products inter-company (t) (payable metal) Other products third-parties (t) (payable metal) Total copper (t) (payable metal) Gold in concentrate and slimes (oz) (payable metal) Chile – Collahuasi* Copper in concentrate (t) inter-company (payable metal) Copper in concentrate (t) third-parties (payable metal) Copper cathode (t) (payable metal) Total copper (t) (payable metal) Gold in concentrate and slimes (oz) (payable metal) Chile – Lomas Bayas and Altonorte Copper cathode (t) (payable metal) Copper anode – inter-company sourced (payable metal) Copper anode – third party sourced (payable metal) Total copper (t) (payable metal) Gold in concentrate and slimes (oz) (payable metal) Peru – Antamina** Copper in concentrate (t) inter-company (payable metal) Copper in concentrate (t) third-parties (payable metal) Other products (payable metal) Total copper (t) (payable metal) Peru-Tintaya Copper in concentrate (t) third-parties (payable metal) Copper cathode (t) (payable metal) Total copper (t) (payable metal) Total copper sales (t) (payable metal) Total gold sales (oz) (payable metal) Average LME copper cash price ($/lb) Average LBM gold price ($/oz) †100% consolidated figures *Including Xstrata's 44% share of Collahuasi **Including Xstrata Copper's pro rata share of Xstrata’s 33.75% interest in Antamina 11,724 158,522 170,246 539,065 80,114 619,179 208,859 37,057 5,870 251,786 82,714 47,517 79,226 359,807 13,516 3,412 503,478 774,000 40,184 121,585 26,995 188,764 – 61,931 79,620 215,590 357,141 23,263 32,575 92,714 – 125,289 77,040 37,446 114,486 1,467,861 1,499,156 3.06 599 25,047 158,954 184,001 507,742 57,297 565,039 221,317 61,886 8,528 291,731 159,097 41,241 131,018 249,064 14,244 608 436,175 613,000 35,290 119,246 26,137 180,673 – 63,746 131,018 162,995 357,759 37,202 33,307 91,567 – 124,874 76,938 37,381 114,319 1,333,852 1,374,338 1.67 445 Xstrata plc Annual Report 2006 | 75 In the recycling operations, volumes of direct smelter feed increased by 43% to 84,000 tonnes. Chile Collahuasi Xstrata acquired a 44% interest in the Collahuasi mine in northern Chile’s Region I through the Falconbridge acquisition. On a pro forma basis, Xstrata’s attributable share in Collahuasi realised revenues of $1.3 billion in 2006, an increase of 103% over 2005. Xstrata’s share of EBITDA more than doubled to $967 million and EBIT increased by 230% to $732 million in 2006 compared to the previous year on a pro forma basis. Xstrata’s share of Collahuasi’s copper-inconcentrate production for 2006 increased 4% to 167,300 tonnes, and benefited from higher ore volumes treated in the second half of the year. Xstrata’s share of copper cathode production from the SX/EW plant was marginally lower at 26,300 tonnes. North Chile The North Chile division comprises the former Falconbridge assets of the Altonorte smelter and the Lomas Bayas mine. Financial performance in 2006 was positively influenced by the buoyant commodity price environment and a strong operating performance, particularly in the second half of the year. Revenue increased by 26% to $1.8 billion in 2006, while EBIT rose by 195% to $351 million. The Lomas Bayas mine achieved a record full-year cathode production of 64,300 tonnes, 2% higher than the prior year. At the Altonorte smelter, copper anode production in 2006 of 282,000 tonnes was 5% lower than the corresponding period, with an improved operating performance in the second half. A new three year labour agreement was achieved with the workforce in December with minimal disruption to the operation. Peru Antamina Xstrata has a 33.75% interest in the Antamina copper-zinc mine in Peru’s Ancash department. Xstrata’s attributable share of Antamina’s financial performance is divided between the Xstrata Copper and Xstrata Zinc business units on the basis of sales revenue. Sales volumes of both copper and molybdenum metal increased in 2006 at Antamina, reaping the benefit of the strong commodity price environment. In particular, molybdenum sales were 9% higher, benefiting from improved recoveries, 8% higher than the previous year, following improvements made to processing circuits late in 2005. On a pro forma basis, Xstrata Copper’s attributable share of revenue increased by 59% from $623 million to $989 million in 2006. The corresponding attributable EBIT increased by 70% from $404 million to $687 million. The overall concentrator throughput in 2006 remained at a similar rate to 2005, as lower throughput for copper-zinc ores, due to harder rock, was offset by higher copper-only ore milling rates. Copper and molybdenum head grades and copper recovery improved marginally year on year, and as a result Xstrata’s share of copperin-concentrate production increased by 3% to 129,700 tonnes. Tintaya Xstrata acquired the Tintaya operation from BHP Billiton in June 2006. Revenue increased 79% to $735 million and EBIT Copper anodes ready to be removed from the casting wheel 76 | Xstrata plc Annual Report 2006 Operational Review | Copper Xstrata Copper has five major growth projects at various stages of evaluation rose 195% to $410 million in 2006 compared with 2005, on a pro forma basis. The operating performance at Tintaya was characterised by record fullyear mill and oxide plant throughputs and a range of efficiency initiatives implemented during the second half of the year. Total material mined of 71.6 million tonnes was 11% higher than 2005, due to haulage and pit phase optimisation. Mill throughput increased by 11% and concentrate production was 10% higher than in 2005. Oxide ore processed was 8% higher than the previous year. Copper-in-concentrate produced was 6% higher than the corresponding period, at 78,300 tonnes, and cathode copper from SX/EW was 3% higher at 36,700 tonnes. Gold in concentrate production of 40,100 ounces was 23% higher compared to 2005. facilitate further planned production increases, environmental and plant refurbishment projects in Canada, the extension and improvements of the leach pads and plant at Lomas Bayas as well as further water borefield exploration at Collahuasi. Major expansionary capital expenditure items for 2007 include the completion of the smelter capacity expansion project at Mount Isa and the construction and completion of the molybdenum plant at Alumbrera. Xstrata Copper now holds the most attractive project development pipeline in the copper industry. Five major projects are currently at various stages of evaluation. The total project development budget expenditure for 2007 is approximately $90 million as work progresses on all of these projects. Argentina Alumbrera The Alumbrera concentrator throughput expansion from 37 million tonnes per annum to 40 million tonnes per annum Developments Sustaining capital expenditure for 2006 was slightly higher than 2005 at $257 million and is expected to increase in 2007 due to a number of key initiatives. These include further underground development work at Mount Isa to The Canadian Copper Refinery (CCR) plant at dusk Xstrata supports the dental health programme for schools in the Catamarca region, Argentina Xstrata plc Annual Report 2006 | 77 EBIT variances: Copper EBIT 31.12.05 Statutory Sales price Volumes Unit cost – real Unit cost – inflation (CPI) Unit cost – mining sector inflation Unit cost – foreign exchange Corporate social involvement Depreciation and amortisation (excluding foreign exchange) Other Acquisitions EBIT 31.12.06 Pro forma $m 920 1,098 (79) (14) (27) (26) 14 (9) (8) (11) 2,670 4,528 was successfully commissioned in November 2006. The project was delivered 35 days ahead of the scheduled start up date and completed within the original budget of $15.5 million. A project to construct a molybdenum flotation plant adjacent to the existing Alumbrera concentrator was approved in July 2006. The new plant is expected to produce more than 2,000 tonnes of molybdenum in concentrate per annum. The project, with a budgeted cost of $15.5 million, is scheduled for commissioning in July 2007. An ongoing ore delineation drilling programme in the Alumbrera pit, undertaken both within the existing ore envelope and for extensions at depth, confirmed 40 million tonnes of additional ore reserves and was announced in August 2006, as part of the mid-year reserve statement. The mine plan was re-optimised based on a new geological model with additional mineralisation, which, together with improved final pit slope angles, resulted in an increase in contained metal reserves of 8%. Exploration drilling at the Xstrata-owned Filo Colorado copper porphyry prospect near the Alumbrera mine commenced in December 2006, following the completion of access road construction in November. Results from the drilling programme are expected in the first half of 2007. El Pachón A pre-feasibility study into the development of the large El Pachón copper deposit in San Juan province commenced in 2006. Completion of the study is expected by the end of 2007. Infrastructure support options in both Argentina and Chile are currently being investigated. Access to the site was achieved in late October after the 159 kilometre access road was cleared of snow. A total of 20,500 metres of drilling is planned around the resource area. Environmental baseline studies are also under way. Australia North Queensland The ore definition programme at Mount Isa has yielded a further 7 million tonnes, equivalent to an additional year of underground ore reserves. An initial Mineral Resource of 72 million tonnes at 1.2% copper has also been defined in the low grade 500 ore body at Mount Isa. Pre-feasibility work on this resource and the surrounding “halo” mineralization surrounding the 1100 ore body will now commence in 2007. Exploration activity in the Mount Isa-Cloncurry region of north-west Queensland continues. Access development to the Northern 3500 underground copper ore body at Mount Isa’s Enterprise copper mine was completed at the end of 2006, with the first stope extracted in December 2006 at a total capital cost of AUD38 million. Production from this ore body will now be progressively increased during 2007 to enable this additional high-grade mining zone to sustain the Enterprise mine’s rated capacity of 3.5 million tonnes per annum and improve the utilisation of the existing hoisting and concentrator capacity. The copper smelter and refinery capacities will continue to be expanded to the planned production rate of 300,000 tonnes per annum during 2007 with the completion of a series of projects. This is designed to match the total copper in concentrate production from the Mount Isa and Ernest Henry copper mines. 78 | Xstrata plc Annual Report 2006 Operational Review | Copper to 75,000 tonnes per annum at an estimated cost of $65 million. Second, the Lomas II project has the potential to extend the life of the Lomas Bayas mine from 2012 at the expanded rate until 2020 by exploiting the Fortuna de Cobre deposit, three kilometres away. A decision on these projects is expected during 2007. El Morro In 2006, delineation drilling at the La Fortuna ore body was closed to a 50 metre grid to depths of over 600 metres below surface, totalling 68,800 metres of mostly core drilling in 170 boreholes. Drilling included 4,877 metres in 16 large diameter core holes that were used for laboratory scale metallurgical test work. An updated Mineral Resource estimate was published in November of 490 million tonnes at a grade of 0.59% copper and 0.52 grams per tonne gold using a 0.3% copper cutoff. Based on this and other support work, a pre-feasibility study was completed towards the end of the year. A feasibility study is planned to be undertaken on this project during 2007. Xstrata Copper holds 70% of El Morro. Metallica Resources owns the remaining 30%. Collahuasi Xstrata and its joint venture partners are undertaking a joint strategic business review of Collahuasi during the first half of 2007, with an objective of developing a revised strategic business plan to maximise the value of Collahuasi for its owners. Peru Tintaya A project to purchase and install a replacement secondary crusher, together with related modifications to the crushing circuit, was approved in October 2006. This project, with a budgeted cost of $8 million, is expected to increase mill Copper smelter at Mount Isa Mines Canada In 2006 the Mine D expansion project was completed at Kidd mine. The project added 14.6 million tonnes of reserves, extending the life of the mine to 2016, at a total capital cost of approximately C$664 million, C$10 million of which is budgeted for 2007. Developed ore reserves now extend to a depth of 8,800 feet. CCR completed a number of installations during 2006 to permit the processing of nickel-rich anodes from CVRD/Inco. These included automated sampling equipment, nickel sulphate filtering equipment, new slimes leaching autoclaves and environmental control equipment. Subsequent to a successful commissioning period, CCR successfully processed 90,000 tonnes of CVRD/Inco anodes by the end of 2006. Chile North Chile Xstrata Copper is completing feasibility studies into a further expansion to the Altonorte smelter that would increase capacity by 30% to process approximately 1.2 million tonnes of copper concentrate a year, producing 400,000 tonnes of copper anode per annum. If approved, expansion construction activities would commence in 2007 and reach full production in 2009. The expansion includes the construction of a new acid plant. Following completion, Altonorte would be the fourth largest copper smelter in the world. At Lomas Bayas, Xstrata Copper is reviewing two key projects that are at the pre-feasibility stage. First, the Lomas expansion case has the potential to expand Lomas Bayas production by 15% Xstrata plc Annual Report 2006 | 79 throughput by 11%, and is scheduled for completion in June 2007. A near-pit exploration and reserve extension programme commenced during 2006 and will continue throughout 2007 with the objective of confirming and extending the ore reserve base at the mine. In addition, a Mineral Resource Statement has been published for the nearby Antapaccay deposit, which identifies a total current resource of 472 million tonnes at 0.74% copper. A $7 million in-fill drill programme and pre-feasibility study has now been approved for this significant deposit, which is located just nine kilometres from the Tintaya plant infrastructure. The drilling programme, involving 40,000 metres of drilling, will be completed by the end of 2007. Antamina An incremental expansion to the Antamina concentrator was approved in November 2006 to increase concentrator throughput capacity by 10%. The project, which includes the installation of a newly designed pulp lifter, a pebble crushing circuit and conveyance system upgrades, at a cost of $37 million, is scheduled for commissioning in January 2008. Las Bambas During the year, 100,000 metres of diamond drilling were completed at Las Bambas, focused on expanding the resources at Ferrobamba, Chalcobamba and Sulfobamba. In addition, initial drill testing of the Charcas and Azuljaja prospects was undertaken. To date, Xstrata has accumulated a total of 156,000 metres of drilling on the project. Based on 2006 drill results, an upgraded total Mineral Resource estimate has been established of 508 million tonnes at a grade of 1.14% copper, 220ppm molybdenum and 0.11 grams per tonne gold at a cut-off grade of 0.5% copper. This substantial increase in mineral resources continues to provide encouragement about the ultimate potential of this exciting mineral district. A project covering an additional programme of 85,000 metres of drilling for 2007, principally covering the currently known deposits of Ferrobamba, Chalcobamba and Sulfobamba, as well as a broader regional exploration programme, has been approved for 2007. A two-year environmental baseline study was initiated in 2006 and conceptual studies will commence in 2007, slightly ahead of the original schedule. Philippines Tampakan Xstrata gave notice of intent to exercise its option to acquire 62.5% of the Tampakan copper-gold deposit in the Philippines on 21 December 2006. Completion of the option exercise and the corresponding transfer of management control to Xstrata Copper is scheduled for 30 March 2007. In 2006, Indophil Resources sole-funded and managed a pre-feasibility study that was completed and delivered to Xstrata in September. Xstrata elected to sole-fund additional work during the period 30 September to 21 December 2006 prior to exercising its option. The Mineral Resource estimated for Tampakan currently stands at two billion tonnes at 0.59% copper and 0.23 grams per tonne gold at a cut-off grade of 0.3% copper. During 2007 the focus of Xstrata’s activities will be to conduct additional optimisation studies to identify a project development case, to be evaluated in a full feasibility study. Papua New Guinea Frieda River Xstrata holds a 72% interest in the Frieda River copper-gold porphyry project. Its joint venture partners are Highlands Pacific Limited (17%) and Japan's OMRD (11%). Prior to 2012, Xstrata may elect to acquire a 72% interest in the adjacent high grade copper-gold Nena deposit for a cash payment of $10.8 million and the completion of a feasibility study within five years. The mineral resources on the property consist of 434 million tonnes at 0.60% copper and 0.38 grams per tonne of gold in the Horse-Ivaal-Trukai porphyry deposit and 42.7 million tonnes at a grade of 3.09% copper and 0.59 grams per tonne gold in the Nena epithermal deposit. Good potential exists to increase the mineral resource inventory. A scoping study is under way to examine infrastructure options and metallurgical test work has begun on mineralization from both deposits. Kidd mining and metallurgical operations, Canada 80 | Xstrata plc Annual Report 2006 Operational Review Operations Xstrata Nickel achieved a record financial performance in 2006. Revenue rose by 56% to $3,364 million compared to the prior year, primarily due nickel to very strong nickel prices. A 3% year-on-year reduction in the output of refined nickel was mostly offset by a 4% increase in ferronickel output at Falcondo. On a pro forma basis, EBIT rose by 180% to $931 million, compared to $333 million for 2005. The full benefit of higher sales prices and higher volumes was tempered by the strengthening of the Canadian dollar, higher oil prices, rising labour costs and increased royalties payments linked to higher metal prices. On a consolidated basis, post by-product credits, nickel cash costs fell by 7% to 2.77¢ per pound, bolstered by stronger copper and precious metal production and robust copper and precious metal prices. Ferronickel cash costs increased by 18% to 5.18¢ per pound, primarily due to higher oil prices. INO Xstrata Nickel’s Integrated Nickel Operations (INO) comprise the Sudbury mines and smelter, Montcalm, and Raglan mine in Canada, together with the Nikkelverk refinery in Norway. Lower levels of ore feed from Sudbury, combined with custom matte feed shortfalls in the second and third quarters, resulted in lower overall sales volumes for the year, down by almost 4% to 82,300 tonnes. This was XNi more than offset by the impact of record sales prices. EBIT was also impacted by increased unit costs from the strengthening of the Canadian dollar, which impacted EBIT by $40 million in 2006, and inflationrelated input costs, such as labour compensation and royalties. Sudbury and Montcalm Mined nickel production at Sudbury operations was impacted by lower nickel ore grade which fell to 1.11% compared to 1.16% in 2005, and poor ground conditions at the Thayer Lindsley mine. As a result, the amount of mined ore processed through Sudbury’s Strathcona mill declined by 13% to 1.89 million tonnes. This decline was largely offset by a significant increase in custom ores milled, which rose more than four-fold to 365,800 tonnes compared to 73,300 tonnes in 2005. The Montcalm mine set a production record in 2006 for net metal nickel produced at 10,600 tonnes, surpassing the 2005 level by 17%. Production of matte at the Sudbury smelter decreased by 2% to 112,400 tonnes, primarily due to lower mine concentrate tonnages, lower feed grades in the first half of the year, and a three-week vacation shutdown in July. The decrease was partially offset by a higher volume of custom feed concentrate. A new three-year labour agreement was signed with production and maintenance employees at Sudbury in early February 2007, with no labour disruptions. Raglan The Raglan mine in the Canadian Arctic increased milled production by 14% to 1,062,400 tonnes. Higher mill throughput was achieved as a result of a mill optimization project, the first phase of which was commissioned in October 2005. View of the Nikkelverk refinery, Norway Xstrata plc Annual Report 2006 | 81 Financial and Operating Data: Nickel $m Pro forma year ended 31.12.06 Pro forma year ended 31.12.05 Revenue INO† Dominican Republic EBITDA INO† Dominican Republic Depreciation & amortisation INO† Dominican Republic EBIT INO† Dominican Republic Share of Group EBIT INO† Dominican Republic Net assets Capital employed ROCE Capital expenditure INO† Dominican Republic Sustaining Expansionary †Includes Canadian mines and Nikkelverk refinery 3,364 2,657 707 1,386 1,034 352 (455) (412) (43) 931 623 308 11.2% 7.5% 3.7% 6,719 6,797 15.4% 372 346 26 162 210 2,161 1,774 387 721 600 121 (388) (353) (35) 333 247 86 8.5% 6.3% 2.2% n/a n/a n/a 367 345 22 162 205 The second phase is expected to be completed in early 2008. The benefits of this programme were partially offset by the impact of lower ore grade which fell from 2.84% in 2005, to 2.56% in 2006. Nikkelverk Production at the Nikkelverk refinery was unfavourably impacted by the shortfall in matte feed from the Sudbury mines and lower refinery custom matte feed between May and August. Refined nickel production decreased to 82,000 tonnes from 85,000 tonnes in 2005. However, an annualized production capacity rate of 86,000 tonnes of nickel was achieved during the earlier and later months of the year. Copper production at the refinery reached a new record of 39,700 tonnes, up 3% from 2005. Cobalt production remained at a similar level to the previous year at 4,900 tonnes, while new records for refined platinum production and rhodium production were achieved during 2006. Falcondo Falcondo, a fully-integrated ferronickel operation in the Dominican Republic, increased sales volumes by 18% to 31,100 tonnes of ferronickel, compared to 26,300 tonnes in 2005. This increase is attributable largely to a drawdown of inventory during the first quarter of 2006, which had been built from late 2005. Increased sales volumes and high nickel Xstrata Nickel achieved a record financial performance in 2006 82 | Xstrata plc Annual Report 2006 Operational Review | Nickel Sales volumes: Nickel Pro forma year ended 31.12.06 Pro forma year ended 31.12.05 North America – INO Total nickel (t) (payable metal) Copper in concentrate (t) inter-company sales (payable metal) Total copper (t) (payable metal) Dominican Republic – Falcondo Ferronickel (t) (payable metal) Europe – Nikkelverk Refined nickel from own mines (t) (payable metal) Refined nickel from third parties (t) (payable metal) Total nickel (t) (payable metal) Total nickel sales (t) (payable metal) Total ferronickel sales (t) (payable metal) Total copper sales (t) (payable metal) Total cobalt sales (t) (payable metal) Average LME nickel cash price ($/lb) Average LME cobalt cash price ($/lb) Average LME copper cash price ($/lb) 82,257 24,948 65,040 31,074 45,471 36,786 82,257 82,257 31,074 65,040 3,763 10.96 14.83 3.06 85,374 21,729 59,470 26,289 53,973 31,401 85,374 85,374 26,289 59,470 3,836 6.69 14.06 1.67 prices were partially offset by increases in production costs. Fuel accounts for nearly 70% of Falcondo’s costs, and in 2006, oil prices rose by 20% to around $59 per barrel, compared to $49 per barrel in 2005. The higher oil prices resulted in an EBIT impact of $39 million. The Kabanga mineral resource was substantially increased to 46 million tonnes (inferred & indicated) at 2.7% nickel Production increased by 4% to 29,700 tonnes, as a result of increased process plant throughput and extra nickel from a new revert recovery plant commissioned in 2006. New records for mining and reclaimed ore tonnages and calcine throughput were also achieved in 2006, delivering 5 million wet metric tonnes and 2.1 million dry metric tonnes, respectively. New Caledonia’s North Province continued in 2006, following receipt of the project’s primary operating and construction permits in December 2005. Detailed engineering and procurement activities progressed well. All major technology packages for the nickel smelter were awarded, and major contracts for the power plant and primary infrastructure were tendered. In September, Xstrata Nickel (49%) and its partner SMSP (51%) announced that due to resource and cost pressures in the global construction market, the project would enter a renewal phase with an emphasis on cost containment and execution planning. The project has made notable progress toward fiscal, legal and regulatory stability agreements with the relevant levels of government in New Caledonia. It is anticipated that formal agreements will be in place by the second quarter of 2007. Developments Koniambo Project Development of the 60,000 tonnes per annum Koniambo ferronickel project in Xstrata plc Annual Report 2006 | 83 In February 2007, Koniambo Nickel announced the commencement of early construction activity on site, including site access, construction facilities (including construction offices and the starter camp), construction services and utilities (water and power). Kabanga Nickel The Kabanga Nickel project is a 50/50 joint venture with Barrick Gold Corporation in Tanzania. In February 2007, Xstrata Nickel announced a tranche of $95 million funding, satisfying the initial joint venture funding obligation of $145 million in total. The initial $50 million funding was committed in May 2005. An extended scoping study phase was concluded in November, resulting in a substantial increase to the Kabanga mineral resource, currently estimated at 46 million tonnes (inferred and indicated), grading 2.7% nickel, with a 1% Ni-Eq cut off grade. A pre-feasibility study was initiated in December 2006 and will include continued exploration work, delineation of the current resources to upgrade the mineral resource classification to the indicated and measured categories, geotechnical, hydrological and project engineering to support final design criteria, a comprehensive Social and Environmental Impact Assessment study, and further definition of the capital and operating costs for development of the project. Araguaia Exploration During the year, 26,000 metres of diamond drilling were completed on the Araguaia project in Brazil, focused on the two known zones of nickel laterite mineralization at Serra do Tapa and Vale dos Sonhos. The resource base continued to expand during the year and now stands at 61.8 million tonnes at 1.63% nickel at a Construction work at the Nickel Rim South project, Sudbury, Canada 1.2% nickel cut off grade; including 43.9 million tonnes at 1.62% nickel in Serro do Tapa, and 17.9 million tonnes at 1.64% nickel in Vale dos Sonhos. These encouraging results have given sufficient confidence to increase the drilling programme by 50%, primarily focused on additional drilling at Serro do Tapa and Vale dos Sonhos to provide the necessary geological information to begin the scoping study in 2007. Additional exploration drilling is also planned on nearby targets with known nickel mineralization identified in wide-spaced scout drilling using remote sensing methodologies proprietary to Xstrata. Sudbury Nickel Rim South Project The Nickel Rim South Project is situated in the East Range of the Sudbury Basin, which is home to existing Xstrata Nickel mines and metallurgical processing facilities. The project is currently in the early stage of development and entails the construction of surface and underground works to facilitate an extensive underground definition drilling programme and rapid ramp-up to 60% of the ultimate 1.25 million tonne per annum production rate in 2009. The Deposit Definition Phase of the project remains on schedule to be completed in the fourth quarter of 2008 within the initial budget of C$627 million ($538 million). Most of the surface infrastructure has been constructed and is operational. Shaft sinking is more than 80% complete. Preliminary underground drilling results have shown mineral location, thicknesses and grades to be consistent with expectations. Underground lateral development will commence in 2007 and most of the definition drilling will be undertaken in 2008. To date, environmental and safety 84 | Xstrata plc Annual Report 2006 Operational Review | Nickel to approvals in the second and third quarters of 2007 and mine production could start as soon as 2009. When brought into production, Fraser Morgan will contribute an estimated 7,200 tonnes of refined nickel per year over its sevenyear expected mine life. Recycling plant Following detailed engineering and pilot testing, completed at the end of the first half, construction work commenced to build a new recycling plant at the Sudbury smelter in September. The total investment for the project is C$21.4 million ($19 million) and commissioning is scheduled in July 2007. The new plant will allow increased custom feed capacity for materials such as nickel-cobalt catalysts, nickel plating sludges and lithium ion/nickel metal hydride batteries by eliminating restrictions on moisture and oil content. Falcondo Falcondo commissioned several significant projects during the year, with an aggregate investment of $26 million. Exploration was initiated at the Loma Ortega 3 area, an extension of the operating Loma Ortega mine. This exploration programme will be completed during 2007. A project to assess the potential to switch Falcondo’s primary source of energy from naphtha produced at site to coal is currently under way. The project is examining the potential to decrease operating costs, using simple rotary kiln technology to reduce the furnace feed. The project will also permit the evaluation of various expansion scenarios. The Loma Miranda area, 25 kilometres from the Falcondo plant site, was drilled in the 1980s and has 12.4 million tonnes of resources at 1.58% nickel. During 2007, the potential for increased ore reserves at the area will be assessed. Raglan Exploration activities at Raglan in 2006 added 2.67 million tonnes of resources grading 3.0% nickel and 0.8% copper. Raglan now contains a total resource of 25.7 million tonnes grading 3.0% nickel and 0.9% copper. In November 2006, capital expenditure of $45 million was approved to refurbish the existing Deception Bay wharf installations. The current wharfs are 35 years old and are used during nine months of the year to bring supplies to the Raglan site and to send nickel-copper concentrate to Quebec City. The project has now entered the engineering, procurement, and construction management stage, and construction will start in June 2007. Raglan’s permanent accommodation facility will be expanded during 2007 at a total capital cost of C$50 million ($44 million). The project will add 60 temporary rooms and 210 permanent rooms to the existing complex. This will allow the dismantling of some of the older temporary camps and add flexibility to the Raglan site operations. Construction is expected to start during the first quarter of 2007, to allow transportation to site during the northern hemisphere summer months, with an anticipated completion date during the first quarter of 2008. Once completed, the additional accommodation will provide extra capacity required for short- and long-term expansion plans at Raglan. High purity nickel crowns, produced at the Nikkelverk refinery, Norway performance at the project has exceeded industry benchmarks with zero critical or significant environmental incidents, a lost time injury frequency rate of 0.89 per million work hours, and a total recordable injury frequency rate of 16.46 per million work hours. Fraser Morgan Project In November 2006, capital expenditure of C$18 million ($16 million) was approved for the first phase of the Fraser Morgan nickel project, located adjacent to the existing Fraser Mine in Sudbury, Canada. This first phase is scheduled to be completed by the second quarter of 2007 and will include the completion of a pre-feasibility study, definition drilling, equipment procurement, and infrastructure upgrades on the 3400-foot level of the current Fraser mine to allow for project development and for potential future ore handling. Subsequent development phases will be subject Xstrata plc Annual Report 2006 | 85 Earnings from the Xstrata Zinc operations escalated rapidly in 2006, with EBIT rising to $1,673 million, more than seven-fold the previous year’s result, zinc primarily due to significantly higher zinc and lead prices compared to the previous year. The acquisition of Falconbridge contributed $679 million to Xstrata Zinc EBIT. XZn Operations of $1.4 million to EBIT. On a C1 pro forma basis, consolidated cash costs increased from 38.7¢ per pound of zinc produced in 2005 to 62.4¢ per pound in 2006, mainly due to the impact of significantly higher zinc prices on realised TCs. Zinc Lead Australia Profitability at the Australian operations was significantly boosted by higher zinc and lead prices in 2006. EBIT rose strongly to $480 million in 2006, almost five times higher than EBIT of $97 million in 2005. The full impact of higher prices was tempered by lower volumes and the effect of inflation in the cost of mining inputs in Australia, in common with the rest of the sector. Production of zinc concentrate from the Mount Isa operations declined by 9% in 2006, despite a 5% increase in ore throughput. Decreased production was due to lower recoveries at the zinc lead concentrator as volumes of transitional ore Aerial view of the Brunswick Mine zinc-lead mine, New Brunswick, Canada While production of zinc metal increased slightly year-on-year, this was more than offset by lower volumes of zinc in concentrate, primarily due to lower production from the Australian zinc-lead operations. Stripping out the impact of CPI and mining sector inflation on input costs, the zinc business achieved real operating cost savings of $57 million, mainly due to a reduction in mining costs at the Australian operations, due to underground mining being replaced by open cut operations at Mount Isa and McArthur River, and improved efficiencies in recovering by-products in the European smelters. These cost savings outweighed the negative impact of mining sector and CPI inflation, resulting in a net contribution 86 | Xstrata plc Annual Report 2006 Operational Review | Zinc Financial and Operating Data: Zinc $m Pro forma year ended 31.12.06 Pro forma year ended 31.12.05 Revenue Zinc lead Australia Zinc Europe Lead Europe Zinc North America* Zinc Peru – Antamina** EBITDA Zinc lead Australia Zinc Europe Lead Europe Zinc North America* Zinc Peru – Antamina** Depreciation & amortisation Zinc lead Australia Zinc Europe Lead Europe Zinc North America* Zinc Peru – Antamina** EBIT Zinc lead Australia Zinc Europe Lead Europe Zinc North America* Zinc Peru – Antamina** Share of Group EBIT Australia Europe North America* Peru** Net assets† Capital employed ROCE Capital expenditure Australia Europe North America* Peru** Sustaining Expansionary †Includes goodwill allocation on acquisition of Falconbridge *Includes Xstrata Zinc’s pro-rata share of CEZ (25%) **Xstrata Zinc’s pro-rata share determined by zinc sales from Xstrata’s 33.75% interest in Antamina 4,774 470 2,465 363 1,355 121 1,946 513 540 12 782 99 (273) (33) (33) (4) (170) (33) 1,673 480 507 8 612 66 20.1% 5.8% 6.2% 7.3% 0.8% 4,848 4,910 51.7% 272 203 53 16 – 114 158 1,997 240 951 258 472 76 398 125 156 22 47 48 (212) (28) (32) (4) (130) (18) 186 97 124 18 (83) 30 4.7% 2.5% 3.6% (2.1)% 0.7% n/a n/a n/a 141 79 42 20 – 94 47 Xstrata plc Annual Report 2006 | 87 feed from the Black Star mine increased to replace ore from the Mount Isa Lead Mine following its closure at the end of 2005. Recoveries were also negatively impacted by delays associated with the commissioning of the first stage of the concentrator capacity expansion project. Batch feeding of ore commenced in the final quarter of the year to increase metallurgical control and improve recoveries. Lead in concentrate production was 28% lower at 108,600 tonnes, also due to the reduced feed grade and recoveries. Following completion of the first stage of the concentrator capacity expansion project in 2006, capacity has improved substantially to 6.5 million tonnes per annum. Low cost ore supply from the Black Star mine will increase accordingly, to ensure full utilisation of the concentrator in 2007. George Fisher achieved ore production of 2.6 million tonnes for the full year, a marginal improvement on 2005. Ongoing efficiency gains and a substantial improvement in shaft hoisting capacity during the year partly compensated for hoist downtime in the first quarter caused by persistent wet weather, and a reduction in accessible ore due to the unstable ground conditions experienced in sections of the mine in the second half. Black Star produced a total of 2.1 million tonnes of ore during its first full year of production following commissioning in February 2005, a 50% improvement on the prior year. Lead in bullion reduced by 26% to 118,300 tonnes as the Mount Isa lead smelter was impacted by lower than expected concentrate production. Underground mining operations ceased at McArthur River Mine in 2006. The volume of material mined increased by 3% over the previous year to 1.9 million tonnes, the vast majority of which was produced from the test open pit. Production of zinc and lead in concentrate was 12% and 13% lower than in 2005 respectively. This was due to lower average zinc and lead head grades of 11% and 4% respectively compared to 12% and 5% in 2005, following the depletion of the number 2 ore body, the mining of bulk stopes and the conversion to lower grade open pit mining from the test pits, and to lower recoveries in the first half. Recoveries were impacted by highly oxidised transitional ore feed to the concentrator but improved in the second half, following the installation of a new circuit cleaner. Zinc Lead Europe The European operations also benefited from the strong zinc and lead prices, with the plants operating at full capacity to maximise output in a robust price Morning crew communications meeting at George Fisher lead mine, Mount Isa The European smelters operated at full capacity to maximise output in a robust price environment 88 | Xstrata plc Annual Report 2006 Operational Review | Zinc environment. EBIT rose to $515 million, up by 263% on 2005 and EBITDA improved to $552 million, 210% higher then the previous year. In 2006, San Juan de Nieva smelter produced over 500,000 tonnes of melted zinc and sales rose to 472,000 tonnes, confirming its position as the largest zinc producing operation globally. Over onefifth of the zinc concentrate treated at San Juan in 2006 came from Xstrata’s Mount Isa and Brunswick mines in Australia and Canada respectively, with the proportion of concentrate sourced internally expected to increase further in 2007 to around onethird. Further improvements in energy efficiency to 25 kilowatt hours per tonne, partly compensated a 12% increase in electricity prices. Loading zinc at the dock, San Juan de Nieva zinc smelter, Spain one filter press to increase filtration capacity and decrease moisture content boosted lead and silver production by 20%, adding more than €1 million ($1.3 million) to revenues. Lead production at Northfleet in 2006 remained at a similar level to 2005 at 163,000 tonnes. This production included a substantial amount of purchased lead to cover production shortfalls at Mount Isa. End of year refined stock was 12,500 tonnes. Silver production decreased by 31% compared to 2005 to 8.2 million ounces, due to lower levels of feed from Mount Isa. Zinc Lead Americas Zinc Americas reported a strong increase in EBIT to $678 million in 2006, $731 million higher than the prior year. EBITDA increased by $786 million, from $95 million in 2005 to $881 million in 2006. Strong commodity prices were the main contributor to this result, coupled with a slight increase in production and sales and a positive contribution from the Kidd Creek smelter, following losses in the previous year. At the Brunswick Mine, ore processed in 2006 increased by 1% compared to 2005 to 3.6 million tonnes. A lightning strike in July that destroyed one of the main mine electrical transformers resulted in two weeks of reduced mine production. Strong metallurgical recoveries and underground operational improvements to minimise waste and improve productivity increased production by 2% year-on-year to 271,800 tonnes of zinc in concentrate. A focus on by-product metals metallurgy also resulted in significant gains in contained lead, copper and silver in concentrate. A 5-year life of mine labour agreement was successfully negotiated with the The Hinojedo roaster produced 41,600 tonnes of calcine, of which 14,300 tonnes were supplied to Nordenham smelter, together with 12,400 tonnes of zinc cathode and slab. The Arnao plant produced 16,800 tonnes of zinc oxide, 4% higher than the previous year, using residues from the San Juan plant and scrap as raw material. Annualised synergies from these initiatives amounted to €8.7 million ($10.9 million). Saleable zinc production at the Nordenham plant increased by 9% or 13,000 tonnes, including 4,000 tonnes from own production and 9,000 tonnes from cathode zinc, slabs from San Juan and other external sources, which was remelted and cast in added-value products. Increased production at Nordenham was achieved using 14,300 tonnes of calcine from the Hinojedo operations in Spain and 4,000 tonnes of calcine from other suppliers. The replacement of two belt fitters with Xstrata plc Annual Report 2006 | 89 United Steelworkers union with no lost time to industrial action. The agreement, signed in June, includes provisions for mine closure, now scheduled for 2010. Refined lead and silver doré production at the Brunswick Smelter was slightly lower than in 2005 at 69,700 tonnes and 200 tonnes respectively due to lower volumes of feed material. Progress continued to improve feed consumption rates, sinter-acid plant availability, and to increase the proportion of higher-margin recycled and residue feed, which comprised 35% of feed material in 2006, up from 30% in 2005. The CEZinc refinery in Quebec produced 266,400 tonnes of cast zinc, 292,800 tonnes of cathode zinc and 477,400 tonnes of sulphuric acid. Although a record 527,300 tonnes of zinc concentrate was treated in 2006, zinc production was 2% lower than in 2005, due to higher iron and lower zinc content in the concentrate feed mix, and a breakdown of one of the electrolyte circulation pipes in the refinery during the first quarter. The Kidd zinc hydrometallurgical plant produced 145,000 tonnes of zinc metal, a 21% improvement over 2005. Improved utilisation, and the absence of a major shutdown and the strike in 2005 were the principal contributors to the positive variance. De-bottlenecking activities successfully resulted in record leach plant throughput 57% higher than in 2005. At the Antamina copper-zinc mine in Peru, ore production in 2006 fell by 8% due to longer haulage distances than planned. Although throughput at the concentrator remained at a constant level to the previous year, zinc concentrate production fell by 15% to 293,100 tonnes, due to lower zinc grade treated in the concentrator. Developments Zinc Lead Australia At George Fisher, further improvements are planned for the second half of 2007 at a total capital cost of approximately AUD26 million in 2007, to increase shaft hoisting capacity to its maximum infrastructure capacity of 3.1 million tonnes per annum. Additional ground support, development and backfill will be undertaken throughout 2007 to enable an increase on current production levels to be achieved. At the Black Star open cut mine at Mount Isa, the Stage 2 ore horizon will continue to be developed throughout 2007 and together with Stage 3 North, which commenced development in June 2006, will provide the bulk of ore production. Ore production from these stages is scheduled to be accelerated in early 2007 to coincide with planned increases in concentrator throughput. The Mount Isa Zinc Lead Concentrator Re-Vamp project was approved during the first half of 2006 and the first stage of this project was commissioned in the fourth quarter, increasing throughput capacity from Mine operators Kel Ward and John Ivers prepared for the day shift at George Fisher lead mine, Australia 90 | Xstrata plc Annual Report 2006 Operational Review | Zinc Sales volumes: Zinc $m Pro forma year ended 31.12.06 Pro forma year ended 31.12.05 Australia – Mount Isa Zinc in concentrate (t) third party sales (payable metal) Zinc in concentrate (t) inter-company sales (payable metal) Total zinc (t) (payable metal) Lead in concentrate (t) third party sales (payable metal) Lead in bullion (t) inter-company sales (payable metal) Total lead (t) (payable metal) Silver in concentrate (koz) third party sales (payable metal) Silver in bullion (koz) inter-company sales (payable metal) Total silver (koz) (payable metal) Australia – McArthur River* Zinc in concentrate (t) third party sales (payable metal) Lead in concentrate (t) third party sales (payable metal) Silver in concentrate (koz) third party sales (payable metal) Europe – San Juan de Nieva Refined zinc (t) Europe – Nordenham Refined zinc (t) Noranda zinc (t) Europe – Northfleet Refined lead (t) Noranda lead (t) Refined silver (koz) North America – Brunswick Zinc in concentrate (t) third party sales (payable metal) Zinc in concentrate (t) inter-company sales (payable metal) Total zinc (t) (payable metal) Lead concentrate (t) third party sales (payable metal) Lead concentrate (t) inter-company sales (payable metal) Zinc in bulk concentrate (t) third party sales (payable metal) Zinc in bulk concentrate (t) inter-company sales (payable metal) Lead in bulk concentrate (t) third party sales (payable metal) Lead in bulk concentrate (t) inter-company sales (payable metal) Silver in bulk concentrate (koz) third party sales (payable metal) Silver in bulk concentrate (koz) inter-company sales (payable metal) Refined lead (t) Silver doré (koz) inter-company sales 70,179 91,086 161,265 3,716 114,115 117,831 505 6,390 6,895 107,163 19,696 171 472,158 159,620 12,182 174,703 6,479 8,198 205,415 – 205,415 – 58,359 29,776 – 23,091 – 1,132 – 60,922 6,714 129,507 65,649 195,156 7,876 159,907 167,783 799 11,295 12,094 122,317 23,552 320 478,482 149,290 148,912 – 12,089 199,139 – 199,139 – 53,696 20,278 – 15,248 – 997 – 70,919 8,235 Xstrata plc Annual Report 2006 | 91 Sales volumes: Zinc $m Pro forma year ended 31.12.06 Pro forma year ended 31.12.05 North America – CEZ ** Refined zinc (t) North America – Kidd Creek Refined zinc (t) Peru – Antamina zinc*** Zinc in concentrate (t) third party sales (payable metal) Zinc in concentrate (t) inter-company sales (payable metal) Total zinc (t) (payable metal) Total Total Total Total Total Total zinc metal third party sales (t) zinc in concentrate third party sales (t) lead metal third party sales (t) lead in concentrate third party sales (t) silver metal third party sales (koz) silver in concentrate third party sales (koz) 64,983 141,638 1,381 43,968 45,349 850,581 413,914 242,107 46,503 8,198 1,808 3,264 1,286 11.57 67,958 116,071 13,696 40,759 54,455 811,801 484,937 219,831 46,676 12,089 2,116 1,382 976 7.31 Average LME zinc cash price ($/t) Average LME lead cash price ($/t) Average LBM silver price ($/oz) *MRM 2005 data are included at 100% **Xstrata Zinc’s pro-rata share of CEZ sales volumes (25%) ***Xstrata Zinc’s pro-rata share of zinc sales from Xstrata’s 33.75% interest in Antamina 5 million to 6.5 million tonnes per annum. The second stage of the $120 million project involves the commissioning of a new milling and flotation circuit to increase capacity to eight million tonnes per annum. Orders for long lead time items have been placed and the project is on schedule for completion in the first half of 2008. Three significant diamond drilling programmes continued to assess the growth and expansion of Black Star Open Cut, Handle Bar Hill Open Cut (George Fisher South) and George Fisher North Deep Underground. Success in these areas will realise further extensions to the life of mine for the Mount Isa zinc-lead operations. In October 2006, the final approvals required to convert the former underground mine at McArthur River to an open cut operation were received from the Northern Territory and Federal Australian governments. The development will include expanding the mine’s footprint and diverting 5.5 kilometres of the seasonal McArthur River around the open pit, to enable production to continue for a mine life of an additional 25 years. MRM conducted a comprehensive environmental assessment of the proposed open pit development which commenced in March 2003. Preliminary civil works have commenced on site to expand the existing test pit operations in order to maintain current production levels while work on the full The first stage of the Mount Isa Zinc Lead Concentrator Re-vamp project was commissioned in the fourth quarter, increasing capacity by 30% 92 | Xstrata plc Annual Report 2006 Operational Review | Zinc open pit development proceeds under a two year programme. The majority of the total capital cost of AUD110 million ($82 million) is expected to be incurred in 2007, with the open pit currently expected to be fully operational from 2009. The capacity of the concentrator at McArthur River Mine will be increased from annual throughput of 1.8 million tonnes of ore to 2.5 million tonnes of ore, at a low capital cost of $37 million. The expansion will enable annual production of zinc-lead concentrate to increase from approximately 320,000 tonnes to approximately 430,000 tonnes of zinc-lead concentrate, including the potential to produce a bulk concentrate with lower lead content, which can be processed in conventional smelters. Additional production will be achieved with no increase to the mine’s overall footprint, through the installation of two newly-developed Xstrata Technology M10,000 IsaMILLs to improve energy efficiency and enable additional production from existing power generation facilities. The expansion is expected to commission in mid 2008 and will be fully operational by the end of the third quarter of 2008. In April 2006 the restart of the Pilara mine and mill at Lennard Shelf was announced, owned through a 50/50 joint venture with Teck Cominco. The estimated capital cost of the restart is AUD23 million and the mine is expected to produce 70,000 to 80,000 tonnes of zinc metal contained in concentrate annually. The first concentrate is scheduled to be produced in February 2007 with a mine life of approximately four years. Lennard Shelf is located in the Kimberley region of Western Australia. Zinc Lead Europe The construction of a silver flotation plant in San Juan de Nieva smelter was completed, on time and on budget, in July 2006 at a cost of €12 million ($15 million). In 2006, the plant produced 3,000 tonnes of silver concentrate. In 2006, efficiency was improved at Nordenham through the installation of a gypsum removal stage which has decreased anode consumption by 40%. A pre-feasibility study into optimizing the Northfleet site plant configuration is currently under way and is expected to be finalised in early 2007. EBIT variances: Zinc EBIT 31.12.05 Statutory Sales price* Volumes Unit cost – real Unit cost – CPI inflation Unit cost – mining sector inflation Other income and expenses Corporate social involvement Depreciation and amortisation (excluding foreign exchange) Acquisition EBIT 31.12.06 Pro forma *Net of commodity price linked costs, treatment and refining charges $m 239 994 (181) 57 (23) (33) (53) (2) (4) 679 1,673 Xstrata plc Annual Report 2006 | 93 Aerial view of the Antamina copper-zinc mine, Peru Zinc Lead Americas Construction commenced on the Perseverance deposit in Northern Quebec with an expected capital cost of C$130 million. The mine is scheduled to be in production in late 2008 and will have an annual production of 228,000 tonnes of zinc concentrate and 35,000 tonnes of copper concentrate. Mine life is expected to be five years. Efforts are ongoing at the Brunswick mine to continue energy-related cost savings in 2007, following a reduction in overall energy requirements of 4% in 2006. In light of strong metal prices, a concerted effort to add resources to the mine reserve base will continue throughout the year. At CEZ, a strategic plan to increase plant throughput was initiated with productivity improvement in the roaster area. The purification residue treatment was completely changed to eliminate arsenic and improve copper cake quality. Capital investments of C$22 million ($19.5 million) will be made in 2007, including investments to increase plant capacity to 280,000 tonnes per annum. As set out in the Xstrata Copper section, an incremental expansion to the Antamina concentrator was approved in November 2006 to increase concentrator throughput capacity by 10% and is scheduled for commissioning in January 2008. A two year ore resource enhancement drilling programme and a three year regional exploration programme will commence at Antamina in 2007. 94 | Xstrata plc Annual Report 2006 Operational Review Xstrata Technology had another strong year in 2006, reflecting both high industry project demand, and the continued market growth of its energy efficient technologies. Sales increased for each product within the Xstrata technology Technology group, boosting revenue by 55% to $120 million and EBIT increased to $22 million. XTech This technology is significantly increasing the energy efficiency of minerals processing in a wide range of applications, and is expected to continue to achieve good growth as the product becomes established across a range of markets. ISASMELT™ The ISASMELT business continued to increase sales, with new projects won in Kazakhstan (two smelters), China, Zambia and Peru, the commissioning of the Mopani smelter in Zambia, and the commissioning of Southern Peru’s ILO smelter in early 2007. ISASMELT has established itself as the new standard copper smelting process due to its low cost, high efficiency, and record of rapid plant start-ups, which results from the comprehensive technical transfer model used by Xstrata Technology. ISASMELT plants will be treating over six million tonnes per annum of copper feed materials early in 2007. The Vedanta ISASMELT at Tuticorin in India exceeded its design capacity of 300,000 tonnes per annum of copper during the year, and is often reported to be the world’s lowest cost copper smelter. Albion Process™ Xstrata Technology has continued to work with Core Resources to market the Albion Process atmospheric leach technology commercially. A second Albion Process Technology licence was issued to Deva Gold Ltd to treat a gold-bearing pyrite concentrate from the Certej project in Romania. There was strong demand for Albion Process testwork, with 11 new work programmes initiated in 2006. The non-core Hydrometallurgy Research Laboratories were sold to Core Resources in November 2006. ISAMILL™ The IsaMILL continued to establish itself as a revolutionary new grinding technology. Installations were completed for Phelps Dodge and Anglo Platinum, and new orders received from five different companies in Australia, South Africa, Canada, New Zealand and Laos. IsaMILL™ installation at Xstrata’s McArthur River mine, Australia LME grade A copper produced using ISAPROCESSTM Xstrata plc Annual Report 2006 | 95 Financial and Operating Data: Technology $m Year ended 31.12.06 Year ended 31.12.05 Revenue EBITDA Depreciation & amortisation EBIT Capital expenditure Net assets Capital employed 120 26 (4) 22 2 46 46 77 14 (4) 10 1 45 45 Jameson Cell™ The Jameson Cell high intensity flotation machine continued to achieve strong take-up for coal operations, especially in Australia and China. The product was also successful in penetrating base metals markets, where it can provide low cost circuit expansions or efficiency improvements. A large cell was commissioned for Zinifex at Century, and another installed for Teck Cominco at Red Dog in Alaska for commissioning in 2007. Tankhouse Technology (including ISAPROCESS™) The group recorded its most successful year, delivering expansion, conversion and equipment supply projects to meet the high demand to increase world refined copper capacity. Major refinery conversion projects were completed at Saganoseki and Tamano in Japan. Other major projects during the year included the Pasar refinery conversion/expansion in the Philippines, Piedras Verdes design and equipment supply in Mexico, cathode plate supply to Guixi tankhouse expansion in China, Nkana Cobalt technology and equipment supply in Zambia, design services to the Kazzinc project in Kazakhstan. In August, Xstrata acquired the Kidd Process technology group as part of the acquisition of Falconbridge Limited. By combining the strengths of both technologies, Xstrata Tankhouse Technology Group now offers greater depth of tankhouse design, equipment selection, start-up and commissioning services. The order book for 2007/2008 is already heavily committed with major projects in China, Africa, Eastern Europe, USA, Brazil, Chile and Kazakhstan. Sales increased for each product within the Xstrata Technology group in 2006 Sustainable Development Responsibility Partnership Xstrata plc Annual Report 2006 | 97 Our commitment to the principles of sustainable development is integral to our strategy and business philosophy. Our Mission, Business Principles and policies recognise that responsible management of our business is necessary for the long-term success of our strategy and will: I enhance Xstrata’s corporate reputation I minimise risk I help us secure access to the most talented people, the best resources and diverse and cost effective sources of capital. development framework. Xstrata’s HSEC Assurance Programme independently audits every managed operation at least once every three years, or more frequently, dependent on the site’s previous audit performance and risk profile. Every managed site was audited in 2005, to provide a comprehensive baseline. A total of 21 audits were carried out in 2006, including 15 sites that did not attain Xstrata’s minimum ’satisfactory’ level in 2005. All but one achieved the ‘satisfactory’ level with most achieving the ‘good’ level. The remaining site (MRM in Australia) will be independently re-audited this year. In addition, a rapid assessment was carried out of every Falconbridge operation through the integration process to assess key risks and identify areas for immediate remediation. A further 27 sites or complexes, including five former Falconbridge operations, will be audited by the end of 2007. Non-financial risks are integrated into site, divisional, commodity business and Group risk registers and risk management programmes. Principal risks and uncertainties from a Group perspective are outlined on pages 22 to 25 of this report. Xstrata publishes a separate, detailed Sustainability Report and reports in accordance with Global Reporting Initiative guidelines. The report includes further details about the issues and initiatives outlined below and is available from www.xstrata.com or as a hard copy on request. URS Verification Limited has independently assessed Xstrata’s sustainability data, performance and reporting against the AA1000 standard for materiality, completeness and responsiveness. An assurance statement is provided in the 2006 Sustainability Report, including a description of the scope of the assurance work and recommendations. HSEC Governance, Leadership and Accountability Xstrata’s Board HSEC Committee is chaired by Ian Strachan and is responsible for monitoring and assessing the effectiveness of Xstrata’s Group HSEC strategy, policies and performance. The corporate governance report on pages 115 to 125 of this report, provides further details about the responsibilities and activities of the Board and its committees. Employees by geography Europe 5% Caribbean 5% South America 15% Africa 31% Ethics Xstrata’s Statement of Business Principles is available from our website and is published separately and distributed to every employee and contractor in the 15 native languages spoken by our workforce. This core document sets out the ethical framework for our activities worldwide. Following the acquisitions made in 2006, the Statement of Business Principles has been reprinted in early 2007 and distributed to every managed operation. It is the responsibility of every employee and contractor to adhere to our Business Principles. North America 24% Australasia 20% The Group General Manager, Sustainable Development reports directly to the Group CEO. In line with our devolved management structure, each commodity business is responsible for its operational performance, within Xstrata’s sustainable 98 | Xstrata plc Annual Report 2006 Sustainable Development A confidential, toll-free “whistleblowing” telephone line and e-mail address is provided for every country in which Xstrata operates, and is run by KPMG. All calls and e-mails received are investigated as appropriate and reported to the Head of Internal Audit and Risk, who reports directly to the Board Audit Committee. Construction materials provided by Minera Alumbrera, Argentina are used to develop irrigation channels in Santa Maria and San José to enhance local agribusiness Our People It is Xstrata’s policy to communicate honestly with employees and encourage consultation between employees and management. No form of workplace discrimination or harassment is tolerated. We give full consideration to applications for employment from disabled persons, where the requirements of the job can be adequately fulfilled by a handicapped or disabled person. Where existing employees become disabled, it is Xstrata’s policy to provide continuing employment under normal terms and conditions and to provide training and career development and promotion to disabled employees as appropriate. We link a significant element of employees’ variable reward to the performance of the Group. Executive directors and senior employees of the Company and its subsidiaries are eligible to participate at the discretion of the Remuneration Committee in the Xstrata Long Term Incentive Plan (LTIP). The vesting of awards and options depends upon the satisfaction of stipulated performance conditions. Further details of the LTIP and other Xstrata share schemes are set out in Note 35 to the Financial Statements and in the Remuneration Report on pages 126 to 139. Xstrata employs approximately 43,000 employees and long-term contractors globally. The management of labour relations is a fundamental responsibility of operational management. We always seek to have a direct relationship between our employees and line management, founded on quality leadership, effective communication and trust. All employees are free to join a union of their choice and to be represented collectively and Xstrata’s workforce is predominantly unionised. Estimations of union membership by commodity business unit are shown in the table on this page. Within Xstrata there are examples of various workplace relations models, including individual agreements and collective bargaining agreements, reflecting the circumstances of any given site and Xstrata’s devolved management structure. Xstrata values diversity in its workforce and we seek to employ people with a varied range of skills, backgrounds and perspectives. No formal diversity targets are in place, with the exception of South Africa, where our businesses are actively recruiting, training and fast-tracking black and female candidates to achieve targets set by the South African Mining Charter. Estimated Union Membership Commodity business Xstrata Alloys Xstrata Aluminum Xstrata Coal Xstrata Copper Country South Africa Americas Australia South Africa Australia North America Chile Peru Argentina Americas Norway Australia North America Europe Union membership (% of workforce) 60% 60% Unavailable* 73% Unavailable* 78% 84% 82% 4% 69% 88% Unavailable* 70% 57% Xstrata Nickel Xstrata Zinc *The collection of union membership statistics in Australia is prevented through privacy laws. Xstrata plc Annual Report 2006 | 99 Xstrata strives to ensure and believes that all of the Group’s operations have, in general, good relations with their employees and unions. In 2006, Xstrata appointed a Group General Manager, Human Resources who reports to the Group CEO. The GM Human Resources is responsible for the administration of group policy on remuneration, performance appraisal, career development and succession planning, recruitment and expatriate management and for the alignment of human resources management and policy with international best practice. Each commodity business is fully resourced to manage its human resources requirements, within the Group’s policies and procedures. In 2006, Xstrata made 204 compulsory redundancies as a result of the acquisitions made. Xstrata seeks to avoid compulsory redundancies where possible and provides all employees with assistance programmes, retraining and support as appropriate. Employee turnover is reported within the key performance indicators section of this report, and is an indication of our success in retaining our permanent employees. In 2006, turnover reduced to 5.2%, including Falconbridge from the date of acquisition. operations reduced the frequency of total recordable injuries by 13% (excluding Falconbridge), the fifth consecutive year of improved safety performance. Tragically, one employee lost his life at a South African operation in 2006 and a further four fatalities have occurred in early 2007. We investigate all fatal incidents and high potential risk incidents, to implement preventative measures across the Group, and are implementing intensive fatality prevention programmes in our South African operations, where the majority of fatal incidents have occurred. Kate Brimblecombe, Environmental Officer, monitoring water at Oaky Creek coal mine, Australia Health Safety Our aim is to operate with zero injuries and we believe that every incident is preventable. Our operations strive to achieve continuous improvements in reducing the number of injuries sustained in the workplace. The total recordable injury frequency rate comprises lost time injuries, restricted work and medical treatment injuries and provides a more comprehensive measure than focusing on lost time injuries alone. In 2006, Xstrata’s In 2006, the former Xstrata operations recorded 31 new occupational health cases, or 58 including the Falconbridge operations from the date of acquisition. These incidents consisted predominantly of noise-induced hearing loss, respiratory conditions and musculo-skeletal injuries some of which result from challenges associated with the increased average age of our Australian and Canadian workforces. Hearing conservation programmes and “buy quiet” programmes are in place 100 | Xstrata plc Annual Report 2006 Sustainable Development at every operation and ongoing programmes are under way to reduce dust in the workplace. Prevalence rates for HIV and AIDs of approximately 20% of our South African workforce make this disease our most significant health issue. Xstrata is implementing innovative HIV and AIDS testing, counselling and treatment programmes across its South African operations and in local communities. Approximately 95% of South African coal employees and contractors now know their HIV status, with new infections falling to a very low rate (0.3%). We are also implementing programmes in other highrisk areas, such as the Dominican Republic, to limit the impact of the disease and prevent new infections. Key environmental performance indicators are reported in the Business Overview and Strategy section of the report. There were no significant or major environmental incidents in 2006. The number of moderate (level 3) incidents increased slightly to 26 from 20 in 2005, with the majority of incidents due to stormwater discharges during tropical storms. Climate change: One of our most significant challenges is to address climate change. We have implemented energy efficiency programmes at every operation, with a particular focus on metallurgical operations. Xstrata Coal actively seeks to play a leadership role in the research and development of clean coal technologies, through advocacy for international support for technological innovation and financial support for a number of clean coal initiatives. In 2006, greenhouse gas emissions (CO2 equivalents) increased by 10% from 2005 levels, due to increased production from the commissioning of new projects, including Rolleston thermal coal, Lion ferrochrome and the Mototolo platinum JV, together with the acquisition of Tintaya copper. Reporting of factors contributing to greenhouse gas emissions also improved due to the implementation of our bespoke sustainability database in 2006. Air emissions: Xstrata’s operations seek to minimise air emissions, in particular sulphur dioxide (SO2) from our metallurgical operations. In 2006, SO2 emissions decreased by 1% in absolute terms compared to the previous year due to a combination of successful emissions reduction initiatives and lower production of lead, partly offset by an increase in SO2 emissions reported by Xstrata Alloys due to improved reporting at a number of sites. Waste: Every managed site is required to maintain an active waste management plan. We seek to recycle non-hazardous waste wherever possible, reducing the waste sent to landfill. Water: Xstrata operates in a number of water scarce areas, including Australia, Chile and other Andean countries. Comprehensive water management studies are being completed to identify further water conservation opportunities. We seek to increase the proportion of water that is recycled and reused on site and make continuous reductions in raw water extraction. A number of initiatives have been implemented in water scarce areas to share water with operations with excess water, and to integrate mine and local community water usage more closely. Responsible closure: Following the acquisition of Falconbridge, Xstrata has gained a significant number of closed operations. Appropriate financial provisions are included in all closure plans to cover social, economic and environmental issues. Environment Xstrata’s operations strive to achieve continuous improvements in environmental performance and seek to prevent, mitigate, reduce or offset the environmental impact of our activities. Every operation is required to maintain an environmental management system consistent with ISO14001. Xstrata Copper’s social involvement programme at the Las Bambas project in Peru is helping to improve health and nutritional levels in rural communities Community Every managed operation develops a corporate social involvement plan in consultation with stakeholders, identifying programmes with a tangible and sustainable community benefit, in line with our corporate social involvement policy. Xstrata sets aside a minimum of 1% of Group profit before tax to support community initiatives. In 2006, Xstrata set aside over $49 million Xstrata plc Annual Report 2006 | 101 Operations Data . Name of operation Ownership Annual production capacity (Full plan/time basis) 100% Production 2006 100% Production 2005 Accounting status Location Xstrata Alloys Boshoek plant Lion plant Lydenburg plant Rustenburg plant Wonderkop plant Boshoek opencast mine Chrome Eden mine Horizon mine Kroondal mine Kroondal opencast mine Thorncliffe mine Helena mine Waterval mine Rhovan V2O5 FeV Swazi Vanadium FeV Maloma mine Char Technologies African Carbon Manufacturers African Carbon Producers African Fine Carbon African Carbon Union Mototolo Xstrata Aluminum Primary Plant – New Madrid Norandal Rolling Mills – Huntingdon East & West – Newport – Salisbury Alumina Refinery – Gramercy Bauxite Mine – Jamaica 100% 100% 100% 100% 50% 50% 253.6kt 158.8kt 16.3kt 43.1kt 1,250kt 5,400kt 253.6kt 156.9kt 16.1kt 42.1kt 1,178.9kt 4,888kt 245.5kt 143.4kt 16.3kt 40.2kt Subsidiary New Madrid, Missouri USA 79.5% 79.5% 69.6% 79.5% 79.5% 79.5% 79.5% 79.5% 79.5% 79.5% 79.5% 79.5% 79.5% 100% 100% 75% 100% 100% 100% 100% 74% 50% 240kt 360kt 396kt 430kt 553kt 360kt 96kt 180kt 1,920kt 540kt 1,440kt 600kt 480kt 23,300k lbs 7,800k kg 2,400k kg 540kt 116kt 147kt 188kt 150kt 117kt 240koz 193kt 44kt 379kt 316kt 249kt – – 74kt 1,363kt 264kt 1,202kt 228kt – 21,651k lbs 4,907k kg – 432kt 96kt 112kt 132kt 94kt 88kt 23koz 196kt Joint venture – Joint venture 374kt Joint venture 383kt Joint venture 333kt Joint venture 34kt Joint venture – Joint venture 52kt Joint venture 1,422kt Joint venture 441kt Joint venture 1,210kt Joint venture – Joint venture 445kt Joint venture 20,166k lbs 4,592k kg 345k kg 272kt 97kt 123kt 174kt 122kt 102kt Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Boshoek, South Africa Steelpoort, South Africa Lydenburg, South Africa Rustenburg, South Africa Marikana, South Africa Boshoek, South Africa Pilansberg, South Africa Pilansberg, South Africa Rustenburg, South Africa Rustenburg, South Africa Steelpoort, South Africa Steelpoort, South Africa Rustenburg, South Africa Brits, South Africa Maloma, Swaziland Maloma, Swaziland Witbank, South Africa Witbank, South Africa Witbank, South Africa Middelburg, South Africa Witbank, South Africa Steelpoort, South Africa – Joint venture Subsidiary Huntingdon, Tennessee USA Subsidiary Newport, Arkansas USA Subsidiary Salisbury, North Carolina USA Gramercy, Louisiana USA St. Ann, Jamaica 1,176.6kt Joint venture 3,745kt Joint venture 102 | Xstrata plc Annual Report 2006 Operations Data Name of Operation Ownership Annual production capacity (Full plan/time basis) 100% Production 2006 100% Production 2005 Accounting Status Location Xstrata Coal Americas Cerrejón Australia Cumnock Liddell Macquarie Coal JV – West Wallsend – Westside Mt Owen Narama Oakbridge Group – Baal Bone – Beltana – Bulga Ulan – Ulan Underground – Ulan Open cast United Oaky Creek Newlands – Thermal – Coking Collinsville – Thermal – Coking Rolleston South Africa iMpunzi Division – Phoenix – Tavistock Mpumalanga Division – Spitzkop – Tselentis Tavistock TESA JV – ATC – ATCOM 74% 74% 74% 74% 74% 74% 1,000kt 2,200kt 1,400kt 1,900kt 1,700kt 2,400kt 1,014kt 2,244kt 762kt 1,858kt 1,616kt 1,950kt 1,009kt 2,044kt 733kt 1,943kt 1,448kt 2,148kt Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Witbank Witbank Ermelo Breyten Witbank Witbank 84% 67.5% 80% 80% 100% 50% 74.1% 68.3% 68.3% 90% 90% 95% 55% 55% 55% 55% 55% 75% 1,100kt 3,000kt 2,400kt 700kt 6,500kt 2,500kt 2,500kt 5,000kt 6,000kt 3,500kt 1,700kt 2,400kt 8,700kt 7,700kt 1,200kt 3,600kt 1,700kt 8,000kt 1,038kt 2,980kt 2,210kt 780kt 5,574kt 2,490kt 1,981kt 4,877kt 5,579kt 2,482kt 2,863kt 2,276kt 7,325kt 6,374kt 1,097kt 2,976kt 1,666kt 4,901kt 1,091kt Subsidiary Hunter Valley Hunter Valley Newcastle Newcastle Hunter Valley Hunter Valley Western Coal Fields Hunter Valley Hunter Valley Western Coal Fields Western Coal Fields Hunter Valley Bowen Basin Bowen Basin Bowen Basin Bowen Basin Bowen Basin Bowen Basin 2,742kt Joint venture 2,313kt Joint venture 666kt Joint venture 5,955kt Subsidiary 2,465kt Joint venture 2,680kt Subsidiary 4,936kt Joint venture 5,100kt Joint venture 2,963kt Joint venture 2,511kt Joint venture 2,672kt Joint venture 6,761kt Joint venture 7,973kt Joint venture 410kt Joint venture 3,138kt Joint venture 1,390kt Joint venture 1,011kt Joint venture 33.3% 31,000kt 28,430kt n/a Joint venture Colombia Xstrata plc Annual Report 2006 | 103 Name of Operation Ownership Annual production capacity (Full plan/time basis) 100% Production 2006 100% Production 2005 Accounting Status Location Tweefontein Division – Boschmans – Goedgevonden – South Witbank – Waterpan – WitCons Mines operated by JV partners – Douglas/Middelburg Xstrata Copper Argentina Alumbrera 74% 74.5% 74% 74% 74% 16% 2,800kt 1,100kt 2,000kt 500kt 1,800kt 25,500kt 2,842kt 1,047kt 2,134kt 2,188kt 1,200kt 21,406 2,152kt Subsidiary 956kt Joint venture 1,855kt Subsidiary 504kt Subsidiary 1,826kt Subsidiary 22,988kt Joint venture Witbank Witbank Witbank Witbank Witbank Witbank / Middelburg 50% 40mt ore 36.4mt 36.6mt 190kt Cu in conc 180.1kt Cu 187.3kt Cu 550koz Au in conc 567.7koz Au 517.8koz Au 50koz Au in dore 73.4koz Au 59.5koz Au 6.5mt ore 190kt Cu in conc 240kt Cu in anode 11mt ore 115kt Cu in conc 120koz Au in conc 280kt Cu cathode 6.2mt 194kt Cu 213kt Cu 10.8mt 84kt Cu 106koz Au 209kt Cu 5.6mt 177kt Cu 220kt Cu 11.4mt 129kt Cu 167koz Au 219kt Cu Subsidiary Catamarca, Argentina Australia Mount Isa 100% Subsidiary North West Queensland, Australia North West Queensland, Australia North Queensland, Australia Quebec, Canada Quebec, Canada Ontario,Canada Ernest Henry 100% Subsidiary Townsville Refinery Canada CCR Horne Kidd Creek Chile Altonorte Collahuasi 100% Subsidiary 100% 100% 370kt Cu cathode 50kt Cu in conc 150kt Cu in anode 368.3tkt Cu 185.0kt Cu 50.4kt Cu 127.9kt Cu 282.0kt Cu 54mt 380.2kt Cu 59.8kt Cu 14.4mt 64.3kt Cu 33.2mt 384.2kt Cu 10.7mt 78.3kt 36.7kt 304.2kt Cu 147.0kt Cu 42.7kt Cu 111.2kt Cu 297.4kt Cu 40.7mt 366.3kt Cu 60.7kt Cu 12.9mt 63.1kt Cu Subsidiary Subsidiary Subsidiary 100% 180kt Cu in anode 100% 290kt Cu in anode 44% 48mt ore 400kt Cu in conc 60kt Cu cathode 13.5mt ore 65kt Cu cathode 35mt ore 380kt Cu in conc 10mt ore 85kt Cu in conc 35kt Cu cathode Subsidiary Subsidiary Antofagasta Region, Chile Tarapacá Region, Chile Lomas Bayas Peru Antamina* Tintaya 100% Subsidiary Antofagasta Region, Chile 33.75% 100% 35.9mt Joint venture 374.6kt Cu 6.1mt 73.9kt 35.5kt Subsidiary Ancash Region, Peru Espinar Province, Peru 104 | Xstrata plc Annual Report 2006 Operations Data Name of Operation Ownership Annual production capacity (Full plan/time basis) 100% Production 2006 100% Production 2005 Accounting Status Location Xstrata Nickel Canada Montcalm 100% 875kt ore 891kt ore 11kt nickel in 11kt nickel in concentrate concentrate 3.0mt ore 130kt nickelcopper matte 1.1mt ore 26kt Ni in concentrate 4.0mt ore 28.5kt Ni in FeNi 86kt Ni 39kt Cu 5.2kt cobalt 2.3mt ore 112kt nickelcopper matte 1.1mt ore 24kt Ni in concentrate 4.1mt ore 30kt Ni in FeNi 82kt Ni 40kt Cu 4.9kt Co 750kt ore 9kt nickel in concentrate 2.2mt ore 114kt nickelcopper matte 1.0mt ore 23t nickel in concentrate 3.9mt ore 29kt Ni in FeNi 85kt Ni 39kt Cu 5.0kt Co Subsidiary Ontario, Canada Sudbury 100% Subsidiary Ontario, Canada Raglan 100% Subsidiary Quebec, Canada Dominican Republic Falcondo 85.3% Subsidiary Bonao, Dominican Republic Norway Nikkelverk 100% Subsidiary Kristiansand, Norway Xstrata Zinc Australia Lennard Shelf McArthur River Mount Isa 50% 100% 100% 55kt Zn in conc On care & On care & Joint venture 13kt Pb in conc maintenance maintenance 1.8mt ore 146kt Zn in conc 6.5mt ore 305kt Zn in conc 170kt Pb in bullion 300t Ag in bullion 3.6 mt ore 275kt Zn in conc 80kt Pb in conc 210t Ag in conc 8kt Cu in conc 110kt refined lead 450t silver doré 275kt Zn 25kt Zn and Pb foundry products 144kt Zn 1.8mt ore 136kt Zn 4.6mt 210kt Zn 118kt Pb 195t Ag 3.6mt 272kt 79kt 219kt 9kt 69.7kt Pb 212t Ag 266.4kt Zn 9,544t 144kt Zn 1.7mt ore 154kt Zn 4.4mt 231kt Zn 160kt Pb 353t Ag 3.5mt 266kt 75kt 204t 6kt 77.0kt Pb 254t Ag 272.4kt Zn 13,318t 114kt Zn Subsidiary Subsidiary Western Australia Northern Territory, Australia North West Queensland, Australia Canada Brunswick Mine 100% Subsidiary New Brunswick, Canada Brunswick Smelting CEZ Refinery General Smelting Kidd Creek Refinery 100% 25% 100% 100% Subsidiary Associate Subsidiary Subsidiary New Brunswick, Canada Quebec, Canada Quebec, Canada Ontario, Canada Xstrata plc Annual Report 2006 | 105 Name of Operation Ownership Annual production capacity (Full plan/time basis) 100% Production 2006 100% Production 2005 Accounting Status Location Germany Nordenham 100% 151kt Zn 145kt saleable Zn 30mt ore 230kt Zn 503kt Zn 482kt saleable Zn 47kt calcine 31kt SO2 24kt ZnO 180kt primary Pb 151kt Zn 145kt saleable Zn 156kt Zn 148kt Zn 141kt saleable Zn Subsidiary Nordenham, Germany Peru Antamina (joint with Xstrata Copper) Spain San Juan de Nieva 100% 503kt Zn 482kt saleable Zn 47kt calcine 31kt SO2 24kt ZnO 162kt primary Pb 501kt Zn 482kt saleable Zn 45kt calcine 30kt SO2 16kt Zn 161kt Pb Subsidiary Asturias, Spain 33.75% 184kt Zn Joint venture Ancash, Peru Hinojedo Arnao UK Northfleet 100% 100% 100% Subsidiary Subsidiary Subsidiary Cantabria, Spain Asturias, Spain Northfleet, UK 106 | Xstrata plc Annual Report 2006 Board of Directors 01 | Willy Strothotte, aged 62, is Chairman of Glencore International. From 1961 to 1978 Mr. Strothotte held various positions with responsibility for international trading in metals and minerals in Germany, Belgium and the USA. In 1978, Mr. Strothotte joined Glencore International, taking up the position of Head of Metals and Minerals in 1984. Mr. Strothotte was appointed Chief Executive Officer of Glencore in 1993 and held the combined positions of Chairman and Chief Executive Officer from 1994 until 2001, when the roles of Chairman and Chief Executive were split. Mr. Strothotte has been Chairman of Xstrata AG since 1994, and Chairman of Xstrata plc since February 2002, and is currently a Director of Century Aluminium Corporation and Minara Resources Limited. 04 | Ivan Glasenberg, aged 50, is Chief Executive Officer of Glencore International, which he joined in 1984. Mr. Glasenberg was appointed to the Board of Xstrata plc in February 2002. He worked in the coal department of Glencore in South Africa for three years and in Australia for two years. From 1989 to 1990, he managed Glencore International’s Hong Kong and Beijing offices. In 1991 he became Head of the Glencore Coal Department and in 2002 Chief Executive Officer of Glencore International. He is also currently a Director of Minara Resources Limited. 07 | Trevor Reid, aged 46, is the Chief Financial Officer of Xstrata. Mr. Reid joined Xstrata AG in January 2002, and was appointed to the Board of Xstrata plc in February 2002. Prior to joining Xstrata, he was Global Head of Resource Banking at the Standard Bank Group. He joined the Standard Bank Group in 1997 from Warrior International Limited, a corporate finance boutique specialising in the minerals sector. 08 | Sir Steve Robson CB, aged 63, retired as Second Permanent Secretary at HM Treasury in January 2001. He joined HM Treasury after leaving university. His early career included a period as Private Secretary to the Chancellor of the Exchequer and a two-year secondment to Investors in Industry plc (3i). From 1997 until his retirement, his responsibilities included the legal framework for regulation of the UK financial services industry, public private partnerships, procurement policy including the private finance initiative and the Treasury’s enterprises and growth unit. Sir Steve is a Director of JPMorgan Cazenove Holdings, Partnerships UK plc and The Royal Bank of Scotland Group plc. Sir Steve was appointed to the Board of Xstrata plc in February 2002 and is Chairman of the Audit Committee. 10 | Ian Strachan, aged 63, is a Director of Reuters Group plc, Johnson Matthey plc, Rolls Royce plc and Transocean Inc. Mr. Strachan was Chairman of Instinet Group from 2003 to 2005 and Chief Executive of BTR plc from 1996 to 1999. Mr. Strachan joined Rio Tinto plc (formerly RTZ plc) as CFO in 1987, and was Deputy Chief Executive from 1991 to 1995. Mr. Strachan was appointed to the Board of Xstrata plc at the Annual General Meeting held in May 2003 and is the Chairman of the Health, Safety, Environment and Community Committee. 11 | Santiago Zaldumbide, aged 64, is an Executive Director of Xstrata plc, Chief Executive of Xstrata Zinc and Executive Chairman of Asturiana de Zinc. Mr. Zaldumbide was appointed to the Board of Xstrata plc in February 2002. He is a previous Chief Executive Officer and Director of Union Explosivos Rio Tinto and of Petroleos del Norte. In 1990, Petroleos del Norte became part of the Repsol Oil Group where Mr. Zaldumbide was responsible for establishing the international structure of the enlarged Repsol Oil Group. In 1994 he was appointed Chief Executive Officer of the Corporación Industrial de Banesto and, in December 1997, Chairman and Chief Executive Officer of Asturiana de Zinc. Mr. Zaldumbide is also a member of the European Advisory Council of Air Products and Chemicals, Inc. and a Director of ThyssenKrupp SA. 05 | Paul Hazen, aged 65, joined the Board of Xstrata AG in May 2000, and was appointed a Director of Xstrata plc in February 2002. Mr. Hazen is a former Chairman and CEO of Wells Fargo and Company from which he retired in April 2001 as Chairman after a 30-year career with the bank. He was also a director of Phelps Dodge Corporation until February 2003 and Deputy Chairman and Lead Independent Director of Vodafone Group Plc until July 2006. Mr. Hazen is currently Chairman of Accel-KKR and of KKR Financial Corp. He also serves as Lead Independent Director of Safeway, Inc., and a Director of Willis Group Holdings Ltd. 02 | Mick Davis, aged 49, is the Chief Executive of Xstrata. Mr. Davis was appointed as Chief Executive of Xstrata AG in October 2001, and was appointed to the Board of Xstrata plc in February 2002. Previously, Mr. Davis was Chief Financial Officer and an Executive Director of Billiton Plc, appointed in July 1997, and served as Executive Chairman of Ingwe Coal Corporation Limited from 1995. He joined Gencor Limited in early 1994 from Eskom, the South African state-owned electricity utility, where he was an Executive Director. 03 | David Rough, aged 56, was a Director of Legal & General Group Plc before retiring from Legal & General in June 2002. As Group Director (Investments), Mr. Rough headed all aspects of fund management within Legal & General Investments. Mr. Rough is currently a director of BBA Group plc, Emap plc, Land Securities plc, Brown, Shipley & Co Ltd and Mithras Investment Trust plc. Mr. Rough was appointed to the Board of Xstrata plc in April 2002, is Deputy Chairman, the Senior Independent Director and Chairman of the Nominations Committee. 06 | Robert MacDonnell, aged 69, joined the Board of Xstrata AG in May 1997, and was appointed to the Board of Xstrata plc in February 2002. Prior to joining Kohlberg Kravis Roberts & Co. in 1976, Mr. MacDonnell was a Management Consultant at Arthur Andersen & Co. He subsequently formed his own firm, which specialised in small management buyouts. Mr. MacDonnell became the first non-founding partner of KKR in 1982 and participated in virtually all investment decisions until the firm expanded in the late 1980s. Mr. MacDonnell is also currently a Director of Safeway, Inc. 09 | Dr. Frederik Roux, aged 59, joined Johannesburg Consolidated Investment Company Limited in 1976, where he held positions in the Finance, Base Metals, Gold and Platinum divisions. In 1990, he joined Gencor Limited where he became Chairman of Alusaf and Executive Director responsible for Gencor Base Metals and Heavy Minerals. Since 1997, he has pursued private business interests in game ranching and safaris in South Africa. Dr. Roux is also Chairman of Impala Platinum Holdings Limited and a director of Zimplats Holdings Limited. Dr. Roux was appointed to the Board of Xstrata plc in February 2002. Xstrata plc Annual Report 2006 | 107 01 02 03 04 05 08 06 07 09 10 11 108 | Xstrata plc Annual Report 2006 Executive Management Executive Committee Mick Davis Chief Executive Trevor Reid Chief Financial Officer Santiago Zaldumbide Chief Executive Xstrata Zinc Peter Coates Chief Executive Xstrata Coal Peet Nienaber Chief Executive Xstrata Alloys Ian Pearce Chief Executive Xstrata Nickel Marc Gonsalves Executive General Manager Corporate Affairs Charlie Sartain Chief Executive Xstrata Copper Executive Management Xstrata Alloys Bill Barrett Managing Director, Vanadium Deon Dreyer Managing Director, Chrome Mark Moffett Chief Financial Officer Deon du Preez Executive Director, Sustainable Development Eric Ratshikhopha Executive Director, Corporate Development Xstrata Aluminum Bill Brooks Chief Executive Alan Brown Vice President, Human Resources Rick Anderson Vice President, Finance Mike Freeman Vice President, Engineering Scott Croft General Manager, Rolled Products Keith Gregston General Manager, Primary Products Mark Eames General Manager, Business Development Murray Houston General Manager Marketing, Atlantic Garry Beck General Manager Marketing, Pacific Peter McKenna General Manager, Engineering and Projects Steven Bridger General Manager, Commercial Colin Whyte General Manager, Corporate Affairs and Sustainable Development Paul Lane Group Manager, Human Resources Xstrata Nickel Dominique Dionne Vice President, Corporate Affairs Steve Flewelling Vice President, Projects and Exploration Eric Edward Henriksen Managing Director, Nikkelverk Denis Lachance Vice President, Raglan Operations Ernest Mast President and General Manager, Falcondo Douglas McLarty Vice President, Legal David Rae Vice President, Strategy and Marketing Mike Romaniuk Vice President, Sudbury Operations Emree Siaroff Vice President, Human Resources Shaun Usmar Vice President, Strategy and Chief Financial Officer Xstrata Copper Steve de Kruijff Chief Operating Officer, North Queensland Copper Jon Evans Chief Operating Officer, North Chile Copper Claude Ferron Chief Operating Officer, Canada Copper Peter Forrestal Executive General Manager, Project Development Louis Irvine Chief Financial Officer José Marun General Manager, Tintaya Jorge Montaldi General Manager, Alumbrera Neal O’Connor General Counsel Alberto Olivero Executive General Manager, Human Resources Rainer Menge General Manager, German Operations Emilio Tamargo General Manager, Business Development & Research Neil Wardle General Manager, Britannia Refined Metals Fred White General Manager, Mount Isa Lead Smelter Bob Sippel Chief Operating Officer, Xstrata Zinc Canada Mario Chapados General Manager, CEZinc Xstrata Zinc Canada Jean Desrosiers Vice President Mining Operations, Xstrata Zinc Canada Corporate Brian Azzopardi Group Controller Richard Elliston Company Secretary Glenn Field Global Head of Internal Audit and Risk Paul Jones General Manager, Sustainable Development Phil Jones General Manager, Human Resources Andrew Latham General Manager, Group Business Development Benny Levene Chief Legal Counsel Thras Moraitis General Manager, Group Strategy and Development Ian Wall Group Treasurer Jason Wilkins Head of IT Xstrata Zinc Iñigo Abarca Chief Legal Counsel Manuel Alvarez General Manager, Assistant to the Chief Executive Jaime Arias General Manager, Spanish Operations Mike Cooper General Manager, Mount Isa Zinc/Lead Concentrator and Expansion Project Brian Hearne General Manager, McArthur River Mine Kevin Hendry General Manager, Mount Isa Zinc/Lead Operations Juan León Chief Financial Officer Xstrata Coal Peter Freyberg Director of Operations Earl Melamed Chief Financial Officer Mick Buffier Chief Operating Officer, New South Wales Ian Cribb Chief Operating Officer, Queensland Sam Coetzer Chief Operating Officer, South Africa Jeff Gerard Chief Operating Officer, Americas Xstrata plc Annual Report 2006 | 109 Directors’ Report Results and dividends The Group’s financial results, including statutory and pro forma income statements, are set out in the Financial Information section and in the Financial Review section of this report. The Board recommends a final dividend of 30¢ per share amounting to $281 million. On a rights issue-adjusted basis, which takes into account the bonus element of the discounted rights issue, this amounts to a full year dividend of 41.6¢ per share, a 36% increase on the comparable 2005 rights issue-adjusted figure. The shareholders will be asked to approve the dividend at the Annual General Meeting on 8 May 2007, for payment on 18 May 2007 to ordinary shareholders whose names were on the register on 27 April 2007. Principal activities Xstrata is a major global diversified mining group, listed on the London and Swiss stock exchanges. Additional information on the Group’s operations is provided in the Business Overview and Strategy, Financial Review, Operational Review sections of this report. Review of the business, future developments and post balance sheet events A review of the business, future developments and post balance sheet events of the Group is presented in the Chairman’s Statement, Chief Executive’s Report and the Business Review from page 2 to page 95. A full description of the acquisition of Falconbridge Limited and its financing, other acquisitions, disposals, and changes to Group companies undertaken during the year, including post balance sheet events, is included in the Financial Review on pages 40 to 55. Exploration and research, development The Group business units carry out exploration and research and development activities that are necessary to support and expand their operations. Financial instruments The Group’s financial risk management objectives and policies are discussed on pages 40 to 55 of the Financial Review. Health, safety, environment & community (HSEC) A review of health, safety and environmental performance and community participation is presented in the Sustainable Development section of this report on pages 96 to 100. Political and charitable donations In accordance with Xstrata’s corporate social involvement (CSI) policy, no political donations were made in 2006. Xstrata’s corporate social involvement expenditure supports initiatives that benefit the communities local to the Group’s operations in the areas of health, education, environment, culture and art, social and community development, enterprise and job creation. In 2006, Xstrata set aside over $49 million for CSI initiatives. Employee policies and involvement The Group’s policy and performance regarding employee involvement, disabled employees, labour relations and employee share schemes is described in the Sustainable Development section on pages 96 to 100. Corporate governance A report on corporate governance and compliance with the provisions of the Combined Code is set out on pages 115 to 125. 110 | Xstrata plc Annual Report 2006 Directors’ Report Disclosure of information to auditors Having made enquiries of fellow directors and of the company’s auditors, each director confirms that to the best of each director’s knowledge and belief, there is no information relevant to the preparation of their report of which the company’s auditors are unaware; and, each director has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the company’s auditors are aware of the information. Going concern The Directors believe, after making inquiries that they consider to be appropriate, that the company has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements. Directors and their interests The directors as at 31 December 2006 were: Director Position First appointed Re-elected Retirement by rotation at AGM Mick Davis Ivan Glasenberg Paul Hazen Robert MacDonnell Sir Steve Robson David Rough Chief Executive Non-Executive Non-Executive* Non-Executive* Non-Executive* Deputy Chairman, Senior Independent Director and Non-Executive* Chief Financial Officer Non-Executive* Non-Executive* Chairman and Non-Executive Executive 25 February 2002 25 February 2002 25 February 2002 25 February 2002 25 February 2002 1 April 2002 6 May 2004 9 May 2006 9 May 2005 9 May 2006 6 May 2004 6 May 2004 Standing for re-election Standing for re-election Standing for re-election Standing for re-election Trevor Reid Dr. Fred Roux Ian Strachan Willy Strothotte Santiago Zaldumbide *denotes independent director 25 February 2002 25 February 2002 8 May 2003 25 February 2002 25 February 2002 9 May 2005 9 May 2006 9 May 2005 9 May 2005 9 May 2006 In addition to the directors listed above, David Issroff was a director until his resignation on 10 May 2006. In accordance with the Articles of Association, four directors will retire and offer themselves for re-election. Details of the resolutions that will be put to the Annual General Meeting are given in the Notice to the Annual General Meeting. Further details about the directors and their roles within the Group are given in the directors’ biographies on page 106. Details of interests in the share capital of the company of those directors in office as at 31 December 2006 are given below. As of the date of this report, there have been no changes. None of the shares were held non-beneficially. No director was interested in the shares of any subsidiary company. Xstrata plc Annual Report 2006 | 111 The company launched a Rights Issue in accordance with the terms of the Rights Issue Prospectus dated 3 October 2006 offering shareholders the right to acquire one new ordinary shares of $0.50 each in the company for every three existing shares held on the Record Date, at a price of £12.65 per share. Following completion of the Rights Issue, the company was notified by Mick Davis, Paul Hazen, Robert MacDonnell, David Rough and Ian Strachan that they had fully taken up their rights to acquire shares. Name of Director Ordinary shares held beneficially as at 1 January 2006 Ordinary shares held beneficially as at 31 December 2006 Name of Director Ordinary shares held beneficially as at 1 January 2006 Ordinary shares held beneficially as at 31 December 2006 Executive Mick Davis Trevor Reid Santiago Zaldumbide 146,380 – 15,706 195,173 – – Non-Executive Ivan Glasenberg Paul Hazen Robert MacDonnell Sir Steve Robson David Rough Dr. Fred Roux Willy Strothotte Ian Strachan – 357,320 595,920 – 14,576 – – 6,500 – 238,213 394,560 – 13,604 – – 8,666 In addition to the above interests in shares, the executive directors, along with other employees, also have interests in the share capital of the company in the form of conditional rights to free shares, options to subscribe for shares and deferred bonus shares. Details of these interests are disclosed in the Directors’ Remuneration Report on pages 126 to 139. Share capital Details of the authorised and issued share capital of the company, including the rights pertaining to each share class, are set out in Note 26 to the Financial Statements. The ordinary issued share capital was increased on 28 March 2006 when the Directors issued and allotted 3,000,000 new ordinary shares of $0.50 shares each to K.B. (C.I.) Nominees Limited for the purposes of the company’s Employee Share Ownership Trust, an employees’ share scheme. The 3,000,000 new ordinary shares rank pari passu with the existing ordinary shares, trade on the London Stock Exchange and the SWX and were admitted to the Official List on 25 April 2006. On 17 May 2006 the company successfully completed the Placing of 61,994,320 ordinary shares with institutions at a price of £21.00. The Placing consisted of 29,450,976 shares held by Batiss Investments Limited pursuant to the Xstrata Group’s equity capital management programme and 32,543,344 new ordinary shares issued by the company ranking pari passu with the existing ordinary shares, trade on the London Stock Exchange and the SWX and were admitted to the Official List of 22 May 2006. The Placing was in connection with the acquisition of the initial 19.8% stake in Falconbridge Limited, and the acquisition of a one third interest in Cerrejon. The company published a Class 1 Circular on 30 May 2006 (“the Circular”) in connection with the proposed (at that time) acquisition of Falconbridge Limited. It was proposed that part of the financing of the acquisition would be raised through an Equity Bridge Facility, as described in the Circular. At an Extraordinary General Meeting of the company held on 30 June 2006, a resolution was passed by the shareholders increasing the authorised share capital of the company from $437,500,000.50 and £50,000 to $7,554,974,199.00 and £50,000 by the creation of an additional 14,234,948,397 ordinary shares of $0.50 each in the capital of the company having the rights and privileges and being subject to the restrictions contained in the Articles of Association of the company and ranking pari passu in all 112 | Xstrata plc Annual Report 2006 Directors’ Report respects with the existing ordinary shares of $0.50 each in the capital of the company. The purpose of this increase was to provide sufficient authorised but unissued share capital to enable the company to refinance the whole of the maximum amount permitted to be drawn under the Equity Bridge Facility. The directors of the company stated in the Circular that it was their intention at the first Annual General Meeting of the company following the full refinancing of the Equity Bridge Facility, to seek shareholder approval to reduce the authorised share capital. At the Annual General Meeting on 8 May 2007, the Directors intend to seek shareholder approval to reduce the authorised share capital of the company from $7,554,974,199.00 to $750,000,000.00 (represented by 1,500,000,000 ordinary shares) by the cancellation of 13,609,948,397 ordinary shares. On 15 August 2003 Xstrata Capital Corporation A.V.V. (“Xstrata Capital”) issued $600,000,000 3.95% guaranteed convertible bonds due 2010. The bonds are convertible into preference shares issued by Xstrata Capital and then exchanged for Xstrata ordinary shares. During the course of the year, certain bondholders gave notice to convert their bonds into Xstrata Capital preference shares which were then exchanged into Xstrata ordinary shares. The total number of shares issued in the year resulting from these conversions totalled 39,317,027 shares. Bonds to the amount of $14,730,000 remain outstanding and if converted would result in the issue of a further 1,684,220 ordinary shares. Under the terms of a Rights Issue Prospectus dated 3 October 2006, the company announced a 1 for 3 Rights issue of up to 235,787,596 new ordinary shares at a price of £12.65 per new share. The purpose of the Rights issue was to refinance part of the debt raised to finance the cash consideration paid in respect of the Falconbridge acquisition. On 30 October 2006 the company announced that valid acceptances had been received in respect of 234,461,198 new shares, and the rump of 1,326,398 new shares had been sold to purchasers at an average price of £22.341 for each new share. The new shares were allotted on 30 October 2006, rank pari passu with the existing ordinary shares, were admitted to the Official List on 5 October 2006 and trade on the London Stock Exchange and the SWX. On 16 October 2006, the Financial Services Authority as UK Listing Authority approved the admission to the Official List by way of blocklisting of 13,575,432 ordinary shares of $0.50 each to be issued upon conversion of the Xstrata Capital Corporation A.V.V. $375,000,000 4% Guaranteed Convertible Bonds due 2017. The ordinary issued share capital was increased on 31 January 2007 when the directors issued and allotted four million new ordinary shares of $0.50 shares each to K.B. (C.I.) Nominees Limited for the purposes of the company’s Employee Share Ownership Trust, an employees’ share scheme. The four million new ordinary shares rank pari passu with the existing ordinary shares, trade on the London Stock Exchange and the SWX and were admitted to the Official List on 7 February 2007. There are no Treasury shares held by the company at the date of this report. The ordinary issued share capital of the company at the date of this report is 970,013,007 ordinary shares. Major interests in shares On 20 March 2007, the following major interest in the ordinary issued shares of $0.50 each of the company had been notified to the company in accordance with Sections 198 to 208 of the Act: Name of shareholder Number of ordinary shares of $0.50 each % of ordinary issued share capital Glencore International AG 336,801,333* 34.72 *On 20 December 2006, the Capital Management Arrangement between Glencore and Credit Suisse Group, which was entered into in connection with the Xstrata Group’s acquisition of MIM Holdings Limited and the associated rights issue in 2003, was terminated. Xstrata plc Annual Report 2006 | 113 Directors’ liabilities The company has granted qualifying third party indemnities to each of its directors against any liability which attaches to them in defending proceedings brought against them, to the extent permitted by the Companies Acts. In addition, directors and officers of the company and its subsidiaries are covered by Directors & Officers liability insurance. Creditor payment policy and practice In view of the international nature of the Group’s operations there is no specific Group-wide policy in respect of payments to suppliers. Individual operating companies are responsible for agreeing terms and conditions for their business transactions and ensuring that suppliers are aware of the terms of payment. It is Group policy that payments are made in accordance with those terms, provided that all trading terms and conditions have been met by the supplier. Xstrata plc is a holding company with no business activity other than the holding of investments in the Group and therefore had no trade creditors at 31 December 2006. Annual General Meeting The Annual General Meeting of the company will be held at Theater-Casino Zug, Artherstrasse 2-4, Zug, Switzerland on Tuesday, 8 May 2007 at 11:00 am (Central European Summer Time). No satellite meeting will be held in London but a live webcast will be provided of the AGM through the company’s website www.xstrata.com. A telephone dial-in facility will also be provided on a listen-only basis. Further details of the dial in facility and webcast will be available from Xstrata’s website www.xstrata.com at least one week in advance of the meeting. Special business at the Annual General Meeting The Notice convening the meeting is sent to shareholders separately with this Report. Resolutions 1 to 8 are termed ordinary business while resolutions 9 to 12 will be special business. These resolutions are: Resolution 9 gives authority to the directors in accordance with Section 80 of the Companies Act 1985 (the “Act”) to exercise all the powers of the company to allot relevant securities (within the meaning of Section 80(2) of the Act) of the company up to an aggregate nominal amount of $161,663,784.50 (equivalent to 323,327,569 ordinary shares of $0.50 each) (being the lesser of the company’s authorised but unissued share capital and one third of its issued capital). This represents 33.33% of the issued ordinary share capital of the company as of the date of this report. The authority extends until the end of the next AGM. The Board does not have any present intention of exercising this authority other than for the purposes of the company’s employee share schemes. Resolution 10 will be proposed as a Special Resolution and will empower the directors to allot for cash, equity securities of a nominal amount not exceeding $24,249,567.50 (equivalent to 48,499,135 ordinary shares of $0.50 each, representing 5% of the issued share capital) without first offering such securities to existing ordinary shareholders. The authority extends until the end of the next AGM. Any issue of shares for cash will, however, still be subject to the requirements of the UK Listing Authority. Resolution 11 will be proposed as a Special Resolution and will allow the company to take advantage of new Companies Act 2006 rules for communications between companies, shareholders and others that came into force on 20 January 2007. The key change in relation to such communications made by the new Act is that a shareholder is assumed to have agreed to a company publishing documents and information on a website if certain conditions are met and procedures followed. Shareholders can, however, ask for a hard copy of any document at any time. 114 | Xstrata plc Annual Report 2006 Directors’ Report Resolution 12 will be proposed as an ordinary resolution and which, if passed, will reduce the authorised share capital of the company from $7,554,974,199.00 to $750,000,000.00 (represented by 1,500,000,000 ordinary shares) by the cancellation of 13,609,948,397 ordinary shares. The reason for this reduction is explained above in the section headed Share Capital. Electronic proxy voting Registered shareholders have the opportunity to submit their votes (or abstain) on all resolutions proposed at the Annual General Meeting by means of an electronic voting facility operated by the company’s Registrar, Computershare Investor Services plc. This facility can be accessed by visiting www.computershare.com. As usual, paper proxy cards will be distributed to all registered shareholders with the Notice of Annual General Meeting. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures described in the CREST Manual. CREST Personal Members or other CREST sponsored member and those CREST members who have appointed any voting service provider(s) should refer to their CREST sponsor or voting service provider(s) who will be able to take the appropriate action on their behalf. The company may treat as invalid a CREST proxy instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. Electronic copies of the Annual Review and Financial Statements 2006 and other publications A copy of the 2006 Annual Report (which includes the Annual Review and Financial Statements, Directors’ Report, Corporate Governance Report and Remuneration Report), the Notice of the Annual General Meeting, the 2006 Sustainability Report and other corporate publications, reports, press releases and announcements are available on the company’s website at www.xstrata.com. Auditors A resolution will be put to the members at the forthcoming Annual General Meeting to re-appoint Ernst & Young LLP as auditors and to authorise the Board to determine the auditor’s remuneration. By order of the Board Richard Elliston Company Secretary 20 March 2007 Xstrata plc Annual Report 2006 | 115 Corporate Governance Report Introduction The Board is committed to the principle of best practice in corporate governance. This report addresses the status of the company’s compliance with the principles and provisions of the Combined Code on Corporate Governance issued on 23 July 2003 (“the Code”), details the key policies, processes and structures that apply within the Group to comply with the Code. Statement by the Directors on corporate governance policies and compliance with the provisions of the Combined Code The Code establishes 14 main Principles of Good Governance, 21 supporting principles and 48 provisions. The Listing Rules require every listed company to report on how it applies the principles in the Code, and to confirm that it complies with the Code’s provisions or, where it does not, to provide an explanation. The company complies with the best practice governance provisions as set out in Section 1 of the Code, except, as explained below, with regard to membership of the Remuneration Committee as the Chairman of the Committee is not considered independent and save that no individual member of the Audit Committee has been identified as having recent and relevant financial experience. A. Directors A.1 The Board The first main principle requires the company to have an effective Board which is collectively responsible for its success. Supporting principles describe the Board’s role to provide entrepreneurial leadership within a framework of controls that allow risk to be assessed and managed. The Board should set strategic aims and the company’s values, ensuring that obligations to shareholders are met. Non-executive directors have a particular role in overseeing the development of strategy, scrutinising management performance and ensuring the integrity of financial information and systems of risk management. The Board is satisfied that it has met these requirements. David Issroff resigned from the Board with effect from 10 May 2006 following his decision to relocate to the United States for personal reasons. Mr. Issroff was a non-executive director and had been appointed to the Board on the nomination of Glencore International AG (“Glencore”) as permitted under the terms of the Relationship Agreement between the company and Glencore. There were no other changes to the membership of the Board during the year. The Board, chaired by Willy Strothotte, has eleven directors, comprising three executive directors and eight non-executive directors. The three executive directors are Mick Davis, the Chief Executive, Trevor Reid, Chief Financial Officer, and Santiago Zaldumbide, Chief Executive of Xstrata Zinc. David Rough, an independent, non-executive director is the Deputy Chairman. The non-executive directors possess a range of experience and are of sufficiently high calibre to bring independent judgement to bear on issues of strategy, performance, and resources that are vital to the success of the Group. The Board is responsible for the governance of the Group on behalf of shareholders within a framework of policies and controls which provide for effective risk assessment and management. The Board provides leadership and articulates the company’s objectives and strategy to achieve those objectives. The Board sets standards of conduct, as documented in an approved Statement of Business Principles, which provide an ethical framework for all Xstrata businesses. While the Board focuses on strategic issues, financial performance, risk management and critical business issues, it also has a formal schedule of matters specifically reserved to it for decision. These reserved matters which are documented in a comprehensive regime of authorisation levels and prior approval requirements for key corporate decisions and actions, are reviewed and updated annually by the Board. Such matters reserved to the Board include, but are not limited to, approval of budgets and business plans, major capital expenditure, major acquisitions and disposals, and other key commitments. Certain powers are delegated by the Board to an Executive Committee which is a Committee of the Board of Xstrata (Schweiz) AG, the main trading subsidiary of Xstrata plc. This Committee and a description of its powers are described on page 125. The company has a policy based on the Model Code published in the Listing Rules, which covers dealings in securities and applies to directors, persons discharging managerial responsibilities, and employee insiders. 116 | Xstrata plc Annual Report 2006 Corporate Governance Report Four scheduled Board meetings were held during the year and five additional meetings were held. Attendance by directors at Board meetings and Committee meetings is shown below. The Chairman held separate meetings with the non-executive directors several times a year following the full Board meetings without the executive directors being present. All Board meetings are held in Switzerland. Attendance at Board meetings and Committees of the Board There are four formally constituted committees of the Board, each of which has formal terms of reference. These can be seen on the company website. Director Board (9) of which 4 were scheduled Audit (4) Health, Safety, Remuneration Environment & (2) Community (3) Nominations (1) Mick Davis Ivan Glasenberg Paul Hazen Robert MacDonnell Sir Steve Robson David Rough Trevor Reid Dr. Fred Roux Ian Strachan Willy Strothotte Santiago Zaldumbide 9 8 6 8 7 8 9 9 7 9 9 3 1 2 1 4 4 4 4 2 2 3 3 3 1 There are four formally constituted committees of the Board, each of which has formal terms of reference. These can be seen on the company website. A.2 Chairman and Chief Executive Another main principle states that there should be a clear division of responsibilities between the running of the Board and executive responsibility for running the business, so that no one person should have unfettered powers of decision. A clear separation is maintained between the responsibilities of the Chairman and the Chief Executive. This is documented in a statement approved by the Board. The Chairman is responsible for leadership of the Board and creating the conditions for overall Board and individual director effectiveness while the Chief Executive is responsible for overall performance of the Group including the responsibility for arranging the effective day-to-day management controls over the running of the Group. A.3 Board balance and independence The company complies with the requirement of the Code that there should be a balance of executive and non-executive directors such that no individual or small group can dominate the Board’s decision taking. Of the eight non-executive directors, six are considered by the Board to be independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement and two, Willy Strothotte and Ivan Glasenberg are directors of Glencore International AG (“Glencore”). Willy Strothotte is Chairman and Ivan Glasenberg is Chief Executive Officer of Glencore. The Board has considered these associations and considers the industry expertise and experience of these directors beneficial to the Group. Xstrata plc Annual Report 2006 | 117 David Rough is the Deputy Chairman and the Senior Independent Director. His role and responsibilities as the Senior Independent Director are detailed in and formalised by Board resolution and, in summary, are that he should be available to shareholders to discuss their concerns where the normal channels would not be appropriate for this purpose, to have contact with analysts and major shareholders to obtain a balanced understanding of their issues and concerns, to chair the Nomination Committee and to lead the Board and director appraisal process. The non-executive directors have a particular responsibility to ensure that the strategies proposed by the executive directors are fully considered. To enable the Board to discharge its duties, all directors receive appropriate and timely information and briefing papers are distributed to all directors. The Board reviews annually the composition and chairmanship of its standing committees, namely the Audit, Remuneration, Nomination and the Health, Safety, Environment & Community Committee. A.4 Appointments to the Board The Code requires there to be a formal, rigorous and transparent procedure for the appointment of new directors, which should be made on merit and against objective criteria. The Nomination Committee fulfils these requirements and its report is set out on page 124. A.5 Information and professional development Another main principle requires that information of appropriate quality is supplied to the Board in a timely manner and that, in addition to induction programmes on joining the company, directors should regularly update their skills and knowledge. All directors are made aware that they may take independent professional advice at the expense of the company in the furtherance of their duties. All directors had access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that all governance matters are complied with and assists with professional development as required. Arrangements have been approved by the Board to ensure that new directors should receive a full, formal and tailored induction on joining the Board. In addition ongoing support and resources are provided to directors in order to enable them to extend and refresh their skills, knowledge and familiarity with the company. Professional development and training is provided in three complementary ways: regular updating with information on changes and proposed changes in laws and regulations affecting the Group or its businesses; arrangements, including site visits, to ensure directors are familiar with the Group’s operations; and, opportunities for professional and skills training. A.6 Performance evaluation In accordance with the Code requirement, the Board undertook a formal and rigorous evaluation of its own performance and that of its Committees and of its individual directors including the Chairman. The process was led by the Senior Independent Director and was based on one-to-one interviews. As a result of the evaluation, a number of outcomes were agreed including a formal review/follow up process after six months following completion of a large project or acquisition, approved by the Board, to monitor how actual performance compared with the original Board approved plan, covering such areas as cost, production levels and timing; an annual presentation or review on senior management succession planning, and changes to Board/Committee processes. A.7 Re-election of directors Under the Code, directors should offer themselves for re-election at regular intervals and there should be a planned and progressive refreshing of the Board. 118 | Xstrata plc Annual Report 2006 Corporate Governance Report One third of all directors are required to retire by rotation at each Annual General Meeting and any director who, at the start of an AGM, has been in office for more than three years since his election must retire. Retiring directors may offer themselves for re-election. A succession plan was approved by the Board during the year to ensure there was a balance of skills and experience on the Board and to plan for an orderly refreshing of Board membership. It is proposed that Messrs Davis, Reid, Rough and Sir Steve Robson will retire and will offer themselves for re-election at the AGM on 8 May 2007. Following an appraisal of the non-executive directors, the Board was satisfied that each director’s performance continues to be effective and that each director continues to demonstrate commitment to the role, and recommended the re-election of the four directors. B. Remuneration Remuneration is covered in the Remuneration Report on pages 126 to 139 and, with regard to the Remuneration Committee, on pages 123 and 124. C. Accountability and Audit C.1 Financial Reporting The Board is required to present a balanced and understandable assessment of the company’s position and prospects. This responsibility extends to annual and interim reports and other price-sensitive reports and reports to regulators as well as to information required to be presented by statutory requirements. The Board is mindful of its responsibility to present a balanced and clear assessment of the company’s position and prospects and the Board is satisfied that it has met this obligation. This assessment is primarily provided in the Chairman’s Statement, the Chief Executive’s Report, and the Operating and Financial Review contained in this Report. The Statement of Directors’ Responsibilities in respect of the Consolidated Financial Statements is set out on page 140. C.2 Internal Control The Code requires the company to maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets. The Board must review, at least annually, the effectiveness of the internal control system and report to shareholders that they have done so. The review should cover all material controls, including financial, operational and compliance controls and risk management systems. Internal Control The Board of Directors is responsible for the Group’s system of internal control. An ongoing process, in accordance with the Guidance of the Turnbull Committee on Internal Control, has been established for identifying, evaluating and managing the significant risks faced by the Group. This process has been in place throughout the year under review up to the date of approval of the annual report and financial statements. The Board relies on reviews undertaken by the Audit Committee (supported by the Business Unit Audit Committees) in relation to the Group’s compliance with the Turnbull Guidance throughout the year. The Audit Committee reviewed the process by which risks are identified and assessed and the effectiveness of the system of internal control by considering the regular reports from management on the operation of the risk assessment process throughout the Group, the key risks identified, mitigating actions and controls, management representations and assertions, and reports covering the independent assessment of internal control systems from Internal Audit, the external auditors and other assurance providers such as Health, Safety and Environmental Management. The principal aim of the system of internal control is the management of business risks that are significant to the fulfilment of the Group’s business objectives with a view to enhancing over time the value of the shareholders’ investment and safeguarding the assets. The internal control systems have been designed to manage rather than eliminate the risk of failure to achieve business objectives and provide reasonable but not absolute assurance against material misstatement or loss. The directors confirm that they have reviewed the effectiveness of the system of internal control. Xstrata plc Annual Report 2006 | 119 Control environment The key elements and procedures that have been established to provide an effective system of internal control are as follows: (i) Organisational Structure There is a well-defined organisational structure with clear operating procedures, lines of responsibility and delegated authority. The way the Group conducts its business, expectations of management and key accountabilities are embodied in the Group’s policies, its Statement of Business Principles and Board Level Authority Limits. The Group operates a decentralised management model with appropriate authority delegated to Commodity Business Unit Boards for the Alloys, Coal, Copper, Nickel and Zinc/Lead businesses. The Business Units are responsible for profitability to the level of earnings before interest and taxation (EBIT). Business Unit Boards meet regularly and either the Group CEO or CFO attend as representatives of Head Office. The Board sets overall policy and delegates the authority to implement that policy to its commodity business units and supporting functions. Group policies are established by head office management for application across the whole Group. (ii) Risk Identification and Evaluation The Board considers effective risk management as essential to the achievement of the Group’s objectives and has implemented a structured and comprehensive system across the Group. The Group Risk Management Policy is published on the Xstrata website at http://www.xstrata.com/reports/doc/x_policy_group_risk_management.pdf. The Xstrata approach to risk management is value driven and has the stated objective of ensuring “an environment where we can confidently grow shareholder value through developing and protecting our people, our assets, our environment and our reputation“. The process is thorough and robust and is an essential element of the Group’s approach to business planning. Each commodity business unit and the head office carry out a comprehensive annual risk review and update its risk register accordingly. Objectives in the business plan are aligned with risks and a summary of the key risks, related internal controls, accountabilities and further mitigating actions that are planned is appended to the business plan that is reviewed and approved by the Executive Committee. Progress against plans, significant changes in the business risk profile and actions taken to address controls and mitigate risks are reported quarterly to the commodity business and Group Audit Committees, and to the Executive Committee and the Board as and when necessary. The output of the process has been reviewed by the Group and commodity business Audit Committees and accords with the Turnbull Guidance. Following the acquisition of Falconbridge, a significant integration programme was completed to embed the necessary policies and procedures within Falconbridge entities and ensure compliance with Xstrata’s Internal Control Framework. (iii) Information and Financial Reporting Systems Financial reporting to the Executive Committee and the Board is continuously modified and enhanced to cater for changing circumstances. The Group’s comprehensive planning and financial reporting procedures include detailed operational budgets for the year ahead and a three-year rolling plan. The Board reviews and approves the annual budget and plan. Plans and budgets are prepared on the basis of consistent economic assumptions determined by the Group Finance function. Performance is monitored and relevant action taken throughout the year through the monthly reporting of key performance indicators, updated forecasts for the year together with information on the key risk areas. 120 | Xstrata plc Annual Report 2006 Corporate Governance Report In addition, comprehensive monthly management reports on a divisional and consolidated basis, including updated forecasts for the year, are prepared and presented to the Executive Committee by the Group Controller and form a cornerstone of the system of internal control. Detailed consolidated management accounts, together with an executive summary from the Chief Executive, are circulated to all directors on a monthly basis. (iv) Investment Appraisal A budgetary process and authorisation levels regulate capital expenditure. For expenditure beyond specified levels, detailed written proposals are submitted to the Executive Committee in accordance with Board delegated authority limits. There is a standardised approval procedure for investment appraisal which includes a detailed calculation of return on equity. Economic assumptions are consistent with those included in management reports and budgets and are agreed with Group Finance. Reviews are carried out after the project is complete and, for some projects, during the construction period, to monitor progress against plan; major overruns are investigated. Commercial, legal and financial due diligence work, using outside consultants, is undertaken in respect of acquisitions as appropriate. (v) Treasury Committee A Treasury Committee operates as a sub-committee of the Executive Committee. Its membership consists of the Chief Executive, the Chief Financial Officer, the Group Treasurer and Group Controller. All meetings are held outside the UK. The Committee recommends group policy, which is approved by the Board, relating to all aspects of funding, management of interest rate and foreign exchange exposures and it co-ordinates relationships with banks, rating agencies and other financial institutions. The Committee monitors all significant treasury activities undertaken by Group companies and ensures compliance with Group policy. A monthly report details the Group cash/debt position, review of bank covenants, exposures and hedging and is circulated to the Executive Committee. (vi) Internal Audit Internal Audit is an important element of the overall process by which the Executive Committee and the Board obtains the assurance it requires that risks are being properly identified, managed and controlled. Risk-based internal audit plans, prepared on an annual basis, are approved by the Audit Committees, and timely reports on achievement of the plans and findings are presented to the Audit Committees. Internal Audit completed a full programme of work in 2006, covering the Business Units and Head Office, focusing in particular on the more significant risks and related internal controls identified in the risk self-assessment process. Findings and agreed actions were reported to management and the Audit Committees. The Group-wide internal audit function is supplemented by services provided as required by KPMG LLP as an outsourced service provider. (vii) Fraud Management There is a formal Group policy relating to fraud management, including reporting and investigation arrangements and whistleblowing procedures. There are independently operated confidential hotlines in each country in which the Group operates, through which employees or contractors can report any breach of Xstrata’s Business Principles, including fraud. The contact details are published in the Statement of Business Principles which can be found on the Xstrata website. All incidents reported are fully investigated and the results are reported to the Plc Audit Committee. C.3 Audit Committee and Auditors A principle of the Code is that the Board should establish formal and transparent arrangements for considering how it should apply the financial reporting and internal control principles and for maintaining an appropriate relationship with the external auditors, Ernst & Young LLP. These responsibilities are delegated to and are discharged by the Audit Committee whose work is described on pages 122 to 123. Xstrata plc Annual Report 2006 | 121 D. Relations with shareholders D.1 Dialogue with shareholders The company is required to have a dialogue with shareholders, based on the mutual understanding of objectives, and it is the responsibility of the Board as a whole to ensure that a satisfactory dialogue does take place. The Code recognises that most shareholder contact is with the Chief Executive and the Chief Financial Officer. However, the Chairman, the senior independent director, and other directors as appropriate, should maintain contact with major shareholders in order to understand their issues and concerns. The Board places considerable importance on effective communication with shareholders. The Chief Executive and Chief Financial Officer, assisted by the Executive General Manager of Corporate Affairs, maintain regular dialogue with and give briefings throughout the year to analysts and institutional investors and are involved in a structured programme of investor, analyst and media site visits. Presentations are given by the Chief Executive and Chief Financial Officer after the company’s preliminary announcements of the year-end results and at the half year. Care is taken to ensure that any price-sensitive information is released to all shareholders, institutional and private, at the same time in accordance with the Disclosure Rules and Swiss Stock Exchange requirements. The Senior Independent Director was available to shareholders for any concern which contact with the Group Chairman, Chief Executive or Chief Financial Officer failed to resolve or for which such contact was inappropriate. All shareholders can obtain access to the annual report and accounts and other current information about the company through the company’s website at www.xstrata.com. The Business Review on pages 15 to 105 include a detailed report on the business and future developments. D.2 Constructive use of the Annual General Meeting All directors normally attend the company’s Annual General Meeting and shareholders are invited to ask questions during the meeting and to meet directors after the formal proceedings have ended. Shareholders at the meeting are advised as to the level of proxy votes received including percentages for and against and the abstentions in respect of each resolution following each vote on a show of hands. At the time of the listing in March 2002, shareholders in the old Xstrata AG were informed that the company would offer shareholders the opportunity to attend general meetings in Switzerland where the head office resides, even though the company was incorporated and has its registered office in England. Given this history and the number of shares still held in or through Switzerland, the Board continues to consider it is appropriate for the Annual General Meeting, to be held in Zug, Switzerland. Due to minimal attendance of shareholders at the satellite meetings held concurrently in London in previous years, no satellite meeting will be held in London at this year’s AGM, but a live webcast will be provided of the Annual General Meeting through the company’s website www.xstrata.com. A telephone dial-in facility will also be provided on a listen-only basis. The Board uses the Annual General Meeting to communicate with institutional and private investors and welcomes their participation. At the Annual General Meeting on 9 May 2006, the Chairman and the Chairmen of the Audit, Remuneration, Nomination and HSEC Committees were present to answer questions. Details of the resolutions to be proposed at the Annual General Meeting on 8 May 2007 can be found in the Notice of the Meeting. In accordance with the Code Provision D.2.4, Notice of the Annual General Meeting and related papers will be sent to shareholders at least 20 working days before the meeting. 122 | Xstrata plc Annual Report 2006 Corporate Governance Report Board Committees The terms of reference of the Audit, Remuneration, Nominations and HSEC Committees are available on the company website. Audit Committee The Audit Committee assists the company’s Board of directors in discharging its responsibilities with regard to financial reporting, external and internal audits and controls, including reviewing the annual financial statements, considering the scope of the company’s annual external audit and the extent of non-audit work undertaken by external auditors, approving the internal audit programme, advising on the appointment of external auditors and reviewing the effectiveness of the company’s internal control systems. The Combined Code recommends that all members of the Audit Committee should be non-executive directors, all of whom are independent in character and judgement and free from relationships or circumstances which are likely to affect, or could appear to affect, their judgement and that at least one member should have recent and relevant financial experience. The Audit Committee comprises four independent non-executive directors, Sir Steve Robson (Chairman of the Committee), David Rough, Fred Roux and Ian Strachan. The Board considered membership of the Committee during the year and, while bearing in mind the Combined Code provision that at least one member of the audit committee should have recent and relevant financial experience, declared its satisfaction that the members of the Committee have requisite skills and attributes, and collectively have sufficient recent and relevant financial experience to discharge its role and responsibilities. The Board therefore considers that it complies with the intent of the Combined Code recommendations regarding the composition of the Audit Committee. The Committee met four times in the year. Four meetings are scheduled for 2007. The Chief Executive, the Chief Financial Officer, the Group Controller, a representative of the company’s external auditors and the Head of Internal Audit normally attend the meetings. In order to further enhance communication and best practice, the Committee invites the Chairmen of the Business Unit Audit Committees and the Chief Executives of the Business Units to attend the Audit Committee meetings on a rotational basis. Other directors of the company and senior management may also, on invitation by the Committee, attend and speak, but not vote at any meeting of the Committee. During the year, the Committee: I I I I I I I reviewed for submission to the Board, the 2005 annual financial statements, the 2006 interim and, in February 2007, the 2006 annual financial statements and reviewed the external auditor’s detailed reports thereon; reviewed the appropriateness of the Group’s accounting policies; reviewed Management Reports prior to approval of the interim and annual accounts and before the Hard Close audit. The Management Report covers areas involving areas of significant judgement, estimation or uncertainty including assessment of fair values, quality of earnings, taxation, treasury, reserves and resources, legal matters, and the appropriateness of preparing the financial statements on a going concern basis; reviewed reports from the external auditor on issues arising from their work; reviewed the external auditor’s plan and scope for the audit of the Group accounts including updated plans following the acquisition of Falconbridge, and approved their remuneration both for audit and non-audit work, and their terms of engagement; recommended to the Board the re-appointment of the external auditors following an evaluation of their effectiveness and confirmation of auditor objectivity and independence; approved revised procedures and practices for the reporting of transactions with Glencore, a related party and requested follow-up on issues resulting from a review of Glencore related party transactions; Xstrata plc Annual Report 2006 | 123 I I I I I I examined the effectiveness of the company’s risk management system including its risk management process and profile, and the company’s internal control systems and operations, and received reports on internal control raised in Business Unit Management Letters. The Committee received reports of the internal control environment at Falconbridge which was considered to be effective; approved the statement on the process by which the Committee and the Board reviews the effectiveness of internal control; reviewed the structure and limits of Group insurance policies which were considered to be appropriate; reviewed and approved the Internal Audit plans for 2007 including updated plans following the acquisition of Falconbridge, the effectiveness of the internal audit function and, at each meeting, reviewed the reports on findings and on progress against recommendations; evaluated the performance of the Committee; reviewed the whistleblowing arrangements within the Group. Following each Committee meeting, separate meetings were held by the Committee with the external auditors in the absence of executive management, with executive management in the absence of the external auditors and with the internal auditor in the absence of executive management and the external auditors. The Group has a specific policy governing the conduct of non-audit work by the external auditors which ensures that the company is in compliance with the requirements of the Combined Code and the Ethical Standards for Auditors published by the Auditing Practices Board. The auditors are permitted to provide non-audit services that are not in conflict with auditor independence. Six-monthly reports are made to the Audit Committee detailing non-audit fees paid to both the external and internal auditors. However, prior approval of the Committee is required for each specific service provided by the external auditors. A range of non-audit services have been pre-approved in principle by the Audit Committee, however, where the fee is likely to be in excess of $100,000 for such services, specific re-approval is required, while prior approval of the Chief Financial Officer is required for those pre-approved services where the fee is likely to be less than $100,000. The Audit Committee is supported and assisted in its work by separate Audit Committees for each Commodity Business Unit in line with the decentralised commodity business unit model. The Business Unit Audit Committees are independent of the executive management of the Business Unit and are chaired by suitably qualified individuals independent of Xstrata. The terms of reference of these Committees follow those of the company’s Audit Committee. Meeting dates precede those of the company’s Audit Committee and minutes of their meetings are circulated to the company’s Audit Committee. Remuneration Committee The Remuneration Committee is chaired by Willy Strothotte. As Chairman of the company and Chairman of Glencore, he is not considered to be an independent director. The Board regards Willy Strothotte’s membership as critical to the work of the Committee due to his extensive knowledge and experience of the global mining resources sector. David Rough and Paul Hazen, the other members of the Committee, are both non-executive directors and independent. The Committee met twice during the year. The Chief Executive attends meetings by invitation but does not participate at a meeting of the Committee (or during the relevant part) at which any part of his remuneration is being discussed or participate in any recommendation or decision concerning his remuneration. The principal roles of the Committee are (i) to consider and determine all elements of the remuneration of the Chief Executive, and Chief Financial Officer and of the Heads of the major operating subsidiaries or business units of the company (the “Executive Group”) as defined by the Chief Executive and (ii) to determine targets for any performance-related remuneration schemes operated by the company. 124 | Xstrata plc Annual Report 2006 Corporate Governance Report During the year under review, the Committee: I I I I I determined the remuneration for the executive directors and reviewed the remuneration arrangements proposed for the members of the Executive Committee for 2007; determined the vesting percentage applicable to awards under the Long Term Incentive Plan 2003 which vested in March 2006, approved the number of shares options and contingent share awards to be awarded under the 2006 Long Term Incentive Plan awards, and the individual awards to members of the Executive Committee; approved amendments to the Annual Bonus Plan, agreed a bonus pool for 2005 and set bonuses for members of the Executive Committee; with respect to the Added Value Incentive Plan, approved proposals regarding the methodology dealing with the situation when an index constituent undergoes a take-over, merger, dissolution or other variation of capital; agreed an increase to the Chairman’s remuneration. The terms of reference of the Remuneration Committee conform precisely to the Code. The setting of non-executive directors’ remuneration was decided by the Board as a whole. Details of the company’s remuneration for executive directors, benefits, share options, pensions entitlements, service contracts and compensation payments are given in the Remuneration Report on pages 126 to 139. A resolution to approve the Remuneration Report will be proposed at the Annual General Meeting. Nominations Committee The Nominations Committee comprises three non-executive directors of which two are independent. It is chaired by David Rough. The terms of reference provide for a formal and transparent procedure. The Committee has responsibility to identify, evaluate and recommend candidates for Board vacancies and to make recommendations on Board composition and balance. One meeting was held in 2006. At this meeting, the Committee: I I reviewed the plan for the retirement by rotation and re-election of directors and the framework for board succession planning to ensure continuity. This is designed to take in account matters such as the size of the company, product diversity and geographical spread, as well as maintaining a balance to the Board in relation to independent/non-independent members, their skills and experience. The Committee also decided that independent non-executive directors ideally should not remain on the board for more than nine years. reviewed a shortlist of potential candidates produced by an executive search company for a non-executive director with broad international experience, based in the UK or Europe. Health, Safety, Environment & Community Committee The Board has established a HSEC Committee to assist the Board to fulfil its HSEC roles and obligations globally. The Board HSEC Committee provides the Board with additional focus and guidance on key global HSEC issues. The Committee comprises Ian Strachan, who chairs the Committee, Mick Davis, David Rough and Fred Roux. Professor Jim Joy is the HSEC Risk Advisor to the Committee and Paul Jones, General Manager Sustainable Development, is Secretary to the Committee. The Committee met three times in the year and there was an informal meeting of the members of the Committee in South Africa with operational site visits. Xstrata plc Annual Report 2006 | 125 During the year, the HSEC Committee: I I I I I I I I I I monitored and evaluated reports on the implementation and effectiveness of HSEC Policy, HSEC Management Standards, HSEC Strategy, HSEC performance and HSEC Governance; monitored and evaluated the implementation and effectiveness of the HSEC assurance programme; monitored and evaluated the implementation and effectiveness of the Zinc, Coal and Alloys Commodity Businesses’ HSEC strategies and plans; monitored and evaluated reports on high potential HSEC incidents and the results of investigations into critical HSEC incidents and the comprehensive South African Fatality Prevention Programmes; monitored and evaluated reports on the HSEC performance of the former Falconbridge operations; received legal Advice on HSEC obligations and HSEC governance arrangements across the business; evaluated a report on ICMM member companies’ HSEC leadership practices; revised the Committee’s terms of reference; monitored and evaluated new developments, issues and/or relevant legislation on HSEC matters; and reviewed a report from the independent verifiers, URS Verification Limited, on the 2005 Sustainability Report. Executive Committee The Executive Committee is a Committee of the Board of Xstrata (Schweiz) AG, the main trading subsidiary of Xstrata plc. The Executive Committee obtains its responsibility and authority from the Xstrata (Schweiz) AG Board and is directly accountable to the Xstrata plc Board. It is chaired by Mick Davis and comprises executive directors, Trevor Reid and Santiago Zaldumbide (also Chief Executive of Xstrata Zinc) together with the Chief Executives of the other Business Units, Peter Coates (Xstrata Coal), Peet Nienaber (Xstrata Alloys), Ian Pearce (Xstrata Nickel), Charlie Sartain (Xstrata Copper), and Marc Gonsalves (Executive General Manager, Corporate Affairs). Other members of senior management are invited to attend Executive Committee meetings as required. The Executive Committee is responsible for implementing strategy, approval of matters consistent with its delegated levels of authority and overseeing the various businesses which comprise the Group. It meets regularly during the year and no meetings are held in the United Kingdom. 126 | Xstrata plc Annual Report 2006 Remuneration Report Information not subject to Audit Remuneration Committee The Remuneration Committee is chaired by Willy Strothotte and its other members are David Rough and Paul Hazen, all of whom are non-executive directors. The Board recognises that Willy Strothotte is not an independent non-executive director as defined by the Combined Code, but regards his membership as critical to the workings of the Committee due to his extensive knowledge and experience of the global mining resources sector. The Remuneration Committee reviews the structure of remuneration for executive directors on an ongoing basis and has responsibility for the determination, within agreed terms of reference, of specific remuneration packages for executive directors and other members of the Executive Committee, including salaries, pension rights, bonuses, long-term incentives, benefits in kind and any compensation payments. The Committee is also aware of the level and structure of remuneration for senior management and advises on any major changes in employee remuneration and benefit structures throughout the Group, including the continuous review of incentive schemes to ensure that they remain appropriate for the Group. The Remuneration Committee commits to bringing independent thought and scrutiny to the development and review process of the Group with regards to remuneration. The Committee met twice during 2006. The Chairman will continue to ensure that the Group maintains contact, as necessary, with its principal shareholders about remuneration. The purpose and function of the Committee in the future will not differ materially from this year and its terms of reference can be found on the Group’s website (www.xstrata.com). The remuneration of non-executive directors, other than the Chairman, will be considered by the Chairman and the Chief Executive and will not be considered by the Remuneration Committee. The Chairman’s remuneration will be determined by the Remuneration Committee while the Chairman is absent. The Chief Executive attends the Remuneration Committee meetings by invitation and assists the Remuneration Committee in its considerations, except when issues relating to his own remuneration are discussed. The Remuneration Committee is provided with national and international pay data collected from external survey providers. During the year, Hay Group provided independent advice to the Remuneration Committee on executive remuneration. The Hay Group provided no other services to the Group during 2006. Remuneration policy Xstrata’s remuneration policy is designed to attract, retain and motivate the highly talented individuals needed to deliver the business strategy and to maximise shareholder wealth creation. The policy for 2006 and, so far as practicable, for subsequent years, will be framed around the following principles for the Executive Committee: I I I remuneration arrangements will be designed to support the business strategy and to align with the interests of Xstrata’s shareholders; total reward levels will be set at appropriate levels to reflect the competitive global market in which Xstrata operates with the intention of positioning within the top quartile for outstanding performance when measured against a peer group of global mining companies and the FTSE100; a high proportion of the remuneration should be “at risk” with performance related remuneration making up at least 50% of the total potential remuneration for Executive Committee members; and Xstrata plc Annual Report 2006 | 127 I performance-related payments will be subject to the satisfaction of demanding and stretching performance targets over the short- and long-term. These performance targets will be set in the context of the prospects of the Group, the prevailing economic environment in which it operates, and the relative performance of comparator companies. The Remuneration Committee considers that a successful remuneration policy needs to be sufficiently flexible to take account of future changes in the business environment and in remuneration practices. Consequently, the remuneration policy and the Remuneration Committee’s terms of reference for subsequent years will be reviewed annually in the light of matters such as changes to corporate governance best practice or changes to accounting, legislation or business practices among peer group mining companies. This will help to ensure that the policy continues to provide Xstrata with a competitive reward strategy. In doing so, the Committee will take into account the UK Listing Rules, the provisions of the Combined Code and associated guidance attached to it, as well as the guidance provided by a number of institutional investor representative bodies on the design of performance-related remuneration. Policies will be sensitive to pay and employment conditions elsewhere in the Group. The Remuneration Committee is satisfied that Xstrata’s pay and employment conditions for non-Board employees around the world are appropriate to the various markets in which it operates. The Remuneration Committee does not consider a ratio comparison between executive directors and non-Board employees to be a useful way of assessing the fairness and equitability of Xstrata’s remuneration practices. The vastly different costs of living in the countries where Xstrata has operations and fluctuations in exchange rates mean any such trend analysis or comparisons with competitors would be meaningless. Elements of remuneration The total remuneration package for executive directors comprises the following principal elements: I base salary; I annual bonus plan including deferred element; I participation in long-term incentive arrangements; I subsisting rights under the Xstrata AG share scheme in relation to individual arrangements (as detailed below); I pension; and I other benefits including housing allowance (where essential for the performance of duties), permanent health, life and private medical insurance. Base salary The base salary of the executive directors is subject to annual review by the Remuneration Committee. The Remuneration Committee reviews external pay data to ensure that the levels of remuneration remain competitive and appropriate in the light of the Group’s policy. The Remuneration Committee is also responsible for ensuring that the positioning of the Group’s remuneration relative to its peers does not result in increases in remuneration without a corresponding increase in performance or responsibilities. When setting base salaries, the Committee also considers the impact on pension contributions and associated costs. During 2006, (with effect from 1 January 2006) base salary increases for Mick Davis, Trevor Reid and Santiago Zaldumbide were 5.3%, 6% and 6% respectively. Base salaries effective 1 January 2007 will be GBP1,100,000, GBP513,055 and EUR879,217, representing increases of 10%, 9% and 6% respectively on salaries paid during 2006. Santiago Zaldumbide has a professional services agreement with Asturiana (dated 29 January 1998) to act as Chairman and Chief Executive of Asturiana. The agreement is in force until 28 February 2007 and continues thereafter indefinitely unless terminated by Asturiana giving six months’ notice to that effect. Up until 31 December 2002, Santiago Zaldumbide was entitled to a total fee for the term of his agreement of EUR3,005,060 payable at a rate of EUR601,012 per annum less any fees received from certain specified external directorships. This fixed contract predates Xstrata’s acquisition of Asturiana. With effect from January 2003, the Remuneration Committee concluded and agreed with Santiago Zaldumbide that his annual fee should be subject to review in line with the other executive directors. 128 | Xstrata plc Annual Report 2006 Remuneration Report On termination of the agreement, other than on his voluntary termination or termination for gross negligence, Santiago Zaldumbide is entitled to receive a sum from the redemption of an insurance policy (acquired by Asturiana for a premium of EUR3,005,060), including any with profits bonus payable under the policy less the compensation received by him during the term of the agreement. This part of the agreement is not affected by the review. Prior to February 2007, on termination of this agreement Santiago Zaldumbide was entitled to receive the capital redemption value of the policy, including the with profit bonus element, minus the aforementioned amount of EUR3,005,060 which he had already received. Santiago Zaldumbide’s entitlements under the insurance policy are in lieu of his receiving pension benefits. Santiago Zaldumbide’s appointment as a director of Xstrata is on an indefinite basis subject to the existence of the agreement between Santiago Zaldumbide and Asturiana. Santiago Zaldumbide will receive no additional remuneration for his position as director of Xstrata Plc but is eligible to participate in the Bonus Plan and the Long Term Incentive Plan. Bonus plan Executive directors and the other members of the Executive Committee are eligible to participate in the Bonus Plan. The Bonus Plan focuses on the achievement of annual objectives, which align the short-term financial performance of the Group with the creation of shareholder value. The bonus is based on Xstrata’s operational performance as measured by return on equity and net profit. Specific targets for return on equity and the proportion of net profits that make up the bonus pool are determined each year by the Remuneration Committee. Before the pool is finalised the Remuneration Committee actively considers whether the pool is appropriate in light of the other key financial and non-financial drivers of future shareholder value. The payment of any bonus under the Bonus Plan is subject to a hurdle rate (for the financial year ending 31 December 2006 and 2007 it will be set such that the Group’s return on equity will be at least equal to the Group’s average cost of borrowing). If this hurdle is not reached, the bonus pool will be zero. The Remuneration Committee has the discretion to vary the basis of calculation and the performance targets for subsequent years. The amount of the bonus pool that is distributed in any one year, and the relative proportions payable to each participant (or, at the discretion of the Remuneration Committee, to a trust for his/her benefit) will be at the discretion of the Remuneration Committee. Individual performance criteria have been agreed with each participant, which will be evaluated by the Committee in determining individual allocations from the bonus pool. The maximum bonus payable under the Bonus Plan for executive directors is 300% of salary. The highest level of bonus will only be available for truly outstanding performance. Bonuses will be payable in up to three tranches, as follows: I I I the maximum bonus which any one participant is eligible to receive in cash, will be limited to 100% of the individual’s base salary; any additional bonus up to a further 100% of base salary will be deferred for a period of one year; any remaining bonus will be deferred for a period of two years. The deferred elements may take the form of conditional awards of Xstrata shares which vest subject to the participant remaining in employment throughout the deferral period. The number of shares awarded will be determined by reference to the market value of the shares at the date the bonus payment is determined. There is no intention to use newly issued ordinary shares for the Bonus Plan and any shares required for the satisfaction of deferred bonuses will be acquired by market purchase. Xstrata plc Annual Report 2006 | 129 Long-Term Incentive Arrangements All equity based awards are subject to an overall limitation on the number of shares issued, transferred from treasury, or that remain issuable pursuant to awards of 10% within any ten year period after the listing date. Added Value Incentive Plan The Added Value Incentive Plan (the “AVP”) was approved at the AGM in 2005. The AVP is designed to incentivise the Chief Executive by providing a share of the long-term value he creates for shareholders over and above the value created by Xstrata’s peer companies and to create alignment with shareholders by means of share ownership. The Remuneration Committee believes that the Chief Executive has a unique role in delivering value to shareholders through the efficient utilisation of Xstrata’s assets and by making value enhancing acquisitions and divestments. For this reason, it is intended that membership of the AVP will be restricted to the current Chief Executive and any future successor in that role. The Chief Executive’s participation in the AVP is contingent on his building up and maintaining a holding of at least 350,000 ordinary Xstrata shares. The holding may be met through shares held beneficially and, subject to the agreement of the Remuneration Committee, fully vested share options that have not yet been exercised and which have exercise prices materially below the market share price at the commencement of the relevant plan cycle. The Chief Executive will no longer be eligible for awards under the Xstrata plc Long Term Incentive Plan (the “LTIP”) in any year when an AVP cycle commences. The LTIP will continue in force for other executive directors and other employees at the discretion of the Remuneration Committee. Payments under the AVP will be based upon the growth in total shareholder return (“TSR”) over a three year performance period relative to an index of global mining companies, which will form the Xstrata TSR Index. At the end of each performance period an Excess Return figure will be calculated, which will quantify the difference in TSR between the Xstrata TSR Index and Xstrata. Once the Excess Return figure has been calculated it will be applied to the market capitalisation of Xstrata at the start of the performance period to measure the “Added Value” added relative to the movement in the market. The Added Value will be limited to 50% of the initial market capitalisation. The market capitalisation of Xstrata at the start of the 2005 AVP cycle was GBP 6,026,084,544 and at the start of the 2006 AVP cycle was GBP 10,692,600,350. If the Added Value is negative (i.e. Xstrata has underperformed the index) there will be no payments from the AVP. If this figure is positive, it will be multiplied by a Participation Percentage (which is 0.5% of the Added Value for the 2005 Plan Cycle, and 0.3% for the 2006 Plan Cycle) to calculate the “Base Reward”. The maximum aggregate Participation Percentage for Plan Cycles commencing in any three-year period shall not exceed 1.1%. The Remuneration Committee recognises that the absolute value received by shareholders is higher when outperforming a rising market than outperforming a market which is static or falling. The Base Reward will be increased or decreased in line with the Xstrata Share Price Index. This will ensure that higher payments are delivered for higher levels of absolute performance, as is the case with an orthodox share option or performance share plan. The adjustment is in line with index performance rather than Xstrata’s to avoid duplicating Xstrata’s outperformance of the index. A reduction will then be made for lower levels of absolute performance, by applying a multiplier to the indexed Base Reward to calculate the Final Reward, as follows: Xstrata absolute TSR over 3 years Multiplier +25% or above 0% –25% or below Straight-line interpolation will apply between these points, for example, if absolute TSR over three years were minus 10%, a multiplier of 0.3 would be applied 1x 0.5 x 0.0 x 130 | Xstrata plc Annual Report 2006 Remuneration Report Provided Xstrata’s TSR is at least equal to that of the Xstrata TSR Index, the Final Reward under each plan cycle will be at least $1,000,000. The Xstrata TSR and Share Price Indices will be weighted by market capitalisation. For the 2005 Plan Cycle, the group comprised initially 19 global mining firms consisting of Xstrata’s key competitors for both financial and human capital. These are: Alcoa Inc, Alcan Inc, Anglo American plc, Arch Coal Inc, BHP Billiton plc, Coal & Allied Industries Ltd. Elkem ASA, Eramet SA, Grupo Mexico SA de CV, Inco Ltd, Korea Zinc Inc, Lonmin plc, Falconbridge Ltd (previously Noranda Inc), Norddeutsche Affinerie AG, Peabody Energy Corp, Phelps Dodge Corp, Rio Tinto plc, Teck Cominco Ltd and Umicore SA. All data are converted into the common currency of US dollars. For the 2006 Plan Cycle, the same group was used with the exception of Elkem ASA, which undertook a capital change prior to the date of grant. In the event of one or more constituents undergoing a take-over, merger, dissolution, verification in capital or any other event that will materially affect calculation of an Index, the Remuneration Committee shall determine how this should be reflected in the Index calculation. The Remuneration Committee may add other relevant competitors to the Index if required. At the end of the three-year performance period, 50% of the Final Reward will vest immediately. The vesting of the remainder will be deferred in equal tranches for further one and two years. Payments under the AVP may be settled in cash or shares as determined by the Remuneration Committee at the date of payment. The Remuneration Committee has to date determined that awards will be settled in shares and it is intended that future awards under the AVP will also be settled in shares. 2005 AVP cycle As at 31 December 2006, the growth of Xstrata’s TSR was 192%, the growth of the Xstrata TSR Index was 79%, and the growth of the Xstrata Share Price Index was 74%, as calculated under the AVP for the 2005 Plan Cycle. This performance represents an out-performance of 113% or additional value to shareholders of GBP 6.8 billion. 2006 AVP cycle As at 31 December 2006, the growth of Xstrata’s TSR was 63%, the growth of the Xstrata TSR index was 10%, and the growth of the Xstrata Share Price Index was 9%, as calculated under the AVP for the 2006 Plan Cycle. This performance represents an out-performance of 53%, or additional value to shareholders of GBP 5.7 billion. Long Term Incentive Plan Executive directors are eligible to participate in the Long Term Incentive Plan, (the “LTIP”). The LTIP aims to focus management’s attention on continuous and sustainable improvements in the underlying financial performance of the Group and on the delivery of superior long-term returns to Xstrata’s shareholders by providing Executives with the opportunity to earn superior levels of reward for outstanding performance. In addition, the LTIP further aligns the interests of shareholders and management by encouraging Executives to build a shareholding in the Group. The LTIP provides for the grant of both contingent awards of free shares (“Free Share Awards”) and share options on the same occasion to the same individual. The two elements are complementary and ensure that the cyclical nature of the industry does not have an excessively adverse effect on employee remuneration in circumstances where the performance of the Group has otherwise been good, relative to that of competitors. The Free Share Awards will ensure that where the Group has performed well over specified performance period, participants will be rewarded even if there is no substantial share price growth due to external factors, such as commodity prices or general economic conditions. The option element will only provide a benefit to participants when shareholders also benefit from future share price growth. Xstrata plc Annual Report 2006 | 131 The options will be subject to stretching performance targets to ensure that windfall growth in the share price as a result of external factors does not deliver rewards which are not justified by the performance of the Group, relative to its peer group. The policy regarding performance targets is discussed in more detail below. The number of ordinary shares over which options will be granted will be calculated using a Black-Scholes valuation of the option (or a similar approach) which the Remuneration Committee considers represents both the cost to Xstrata of providing the benefit and the value of the option itself as a component of the total remuneration package. The option value at grant will not be less than 25% of the value of the underlying shares. In determining the value of Free Share Awards the value of the underlying shares will be used. Using the method above, the value ratio of Free Share Awards to share options for awards made during 2006 was in general 1:1, based on the value at the time of grant. The Remuneration Committee may change the ratio for future awards if it is thought appropriate. The Remuneration Committee has determined that annual awards will be made under the LTIP to minimise the impact of share price volatility and to reflect existing best practice. The rules of the LTIP provide that the aggregate value of options and Free Share Awards made to an individual in any one year may not exceed an amount equal to two times base salary in normal circumstances (although in exceptional circumstances the limit may be up to, but not exceed, four times base salary). Summary of performance conditions During 2004, 2005 and 2006, executive directors were granted market value options and Free Share Awards under the LTIP. The vesting of both the options and Free Share Awards is subject to the satisfaction of stretching performance conditions over a three-year performance period. Half of the options and Free Share Awards are conditional on Total Shareholder Return (“TSR”) relative to a peer group and half are conditional on the Group’s real cost savings relative to targets set on a stretching scale over the three-year period, as follows. For the awards conditional on TSR, 25% of the combined award will vest if TSR growth is at the median of the specified peer group, the full 50% of the combined award will vest for performance at or above the second decile with straight line vesting between these points. No vesting will occur for TSR growth below median performance. For the remaining award, vesting is conditional on the Group’s real cost savings relative to targets set on a stretching scale: 25% of the combined award will vest for 1% cost savings, 35% for 2% cost savings and 50% for 3% or more cost savings, with straight line vesting between these points. No vesting will occur for cost savings that are less than 1%. Real cost savings will be measured in relation to operating costs after adjusting for the effects of inflation, excluding depreciation, commodity price linked costs, effects of currencies on translation of local currency costs and planned life of mine adjustments. Since the Group’s share price and those of its peers are significantly influenced by the cycle in commodity prices, the Remuneration Committee considers TSR relative to a peer group to be an appropriate performance measure as it rewards relative success in growing shareholder value through the development and execution of the corporate strategy. The Remuneration Committee is also satisfied that TSR will be a genuine reflection of the Group’s underlying financial performance. The use of the second measure, Group real cost savings relative to targets, reflects the Group’s strategic initiative to add shareholder value through productivity and cost efficiencies. Furthermore, the use of a financial performance measure alongside a relative TSR measure is aligned with current corporate governance best practice. The performance targets are not capable of being retested at the end of the performance period, so that any proportion of a Free Share Award or option which does not vest after three years will lapse, although vested options will remain exercisable for a maximum of seven years or such shorter period as the Remuneration Committee may specify (after which they will lapse). 132 | Xstrata plc Annual Report 2006 Remuneration Report The peer group of global mining companies used to determine the vesting of the options and Free Share Awards that are conditional on TSR in the 2004 and 2005 LTIP comprises the same 19 companies used to form the Xstrata Share Indices for the CEO’s Added Value Incentive Plan (2005 Cycle) detailed above, plus WMC Resources Ltd. For the 2006 LTIP award, the peer group comprises the same 18 companies used to form the Xstrata Share Indices for the CEO’s Added Value Incentive Plan (2006 Cycle). It is envisaged that this peer group, excluding Falconbridge Ltd, Inco Ltd and Phelps Dodge Corporation will be used to determine the vesting of any options and Free Share Awards that are granted in 2007, although the Remuneration Committee may, at its absolute discretion, vary, add, remove or alter the companies making up the peer group where events happen which cause the Remuneration Committee to consider that such a change is appropriate to ensure that the performance condition continues to represent a fair measure of performance. This is provided that the Remuneration Committee reasonably considers such a varied or amended performance condition is not materially easier or more difficult to satisfy. In calculating the TSR, the common currency of US dollars will be used and the share price of a notional parcel of shares of the Group and the companies in the specified peer group will be averaged over a period preceding both the start and end of the relevant performance period. The Remuneration Committee has resolved that averaging over a three month period eliminates the volatility in spot share prices that could otherwise distort the assessment of whether the target has been met. The TSR of the Group and each member of the peer group over any performance period is calculated by taking the growth between the closing value and the base value of 100 shares expressed as a percentage of the base value, on the assumption that any net dividend per share paid by any company during the relevant performance period is reinvested in shares on the last day of the month during which the relevant shares go ex-dividend. This calculation is subject to such adjustments to closing value and base value as the Remuneration Committee considers appropriate to reflect any variation of share capital or any merger, take-over, reconstruction, demerger or change in listing status by any member of the peer group or upon any other events which the Remuneration Committee considers may materially distort the calculation. 2005 LTIP Award At 31 December 2006, the Group was ranked 4th out of the peer group of 21 companies (including Xstrata) in terms of TSR for the 2005 award. If this is the outcome at the end of the three-year performance period then 100% of each executive director’s 2005 award linked to TSR will vest. 2006 LTIP Award At 31 December 2006, the Group was ranked 2nd out of the peer group of 19 companies (including Xstrata) in terms of TSR for the 2006 award. If this is the outcome at the end of the three-year performance period then 100% of each executive director’s 2006 award linked to TSR will vest. It should be noted that these amounts are based on the Group’s results at this provisional stage and do not necessarily reflect the eventual outcome. 2004 LTIP award vesting in 2007 At 3 March 2007, the Group was ranked 2nd out of the peer group of 21 companies (including Xstrata) in terms of TSR, and the Group had achieved real cost savings of 5.3%. As a result 100% of each executive director’s total 2004 LTIP award vested. Subsisting rights under Xstrata AG share schemes Subsisting options held by Mick Davis and Trevor Reid pursuant to terms on which they were recruited are held on terms which reflect the provisions of the Management and Employee Share Incentive Scheme previously operated by Xstrata AG, except as expressly provided otherwise. These options were converted into equivalent options over ordinary shares in the Group at the time of the listing of the Group’s Xstrata plc Annual Report 2006 | 133 shares on the London Stock Exchange (“the Listing”) but otherwise continue to be subject to the terms and conditions (as modified) of the original Xstrata AG share scheme. It is intended that the replacement options will as far as possible be satisfied by the transfer of ordinary shares in the Group held by the trustees of the Xstrata Employee Share Ownership Trust and the Xstrata Employee and Directors Share Ownership Trust. Whilst subsisting options continue to exist under this scheme, no future grants will be made. Subsisting options are not subject to performance conditions because they were originally granted under arrangements (which did not provide for awards to be subject to performance) which related to Xstrata AG prior to the Group becoming a UK listed company. Performance Graph GBP 800 600 400 200 0 19 March 02 31 Dec 02 31 Dec 03 31 Dec 04 30 Dec 05 29 Dec 06 FTSE 100 Xstrata plc The performance graph set out above shows the TSR for a holding of shares of the Group over the period of listing (19 March 2002 to 31 December 2006) compared with the TSR for a hypothetical holding of shares of the same kinds and number as those by reference to which the FTSE100 index is calculated. The Board considers that the FTSE 100 currently represents the most appropriate of the published indices for these purposes. TSR has been calculated on a spot basis with effect from 19 March 2002, the date of IPO, assuming that an equivalent sum was invested on that day in shares of the Group and in the FTSE 100 index. Dividends are invested in additional shares and benefits receivable in the form of shares are also added to the relevant holding. Pensions Mick Davis and Trevor Reid have participated in money purchase retirement plans from their respective dates of joining the Group. The plans are designed having regard to the taxation and employment status of each executive. Group contributions are re-assessed at regular intervals and are based on actuarial advice with the objective of accumulating sufficient funds over the working lifetime of each executive to provide an overall target pension which is currently intended to be equivalent to approximately 60% of final salary at normal retirement age for Executives who begin participating in the plans at the age of 40. Prior to 6 April 2006, these contributions were paid to a combination of an approved money purchase pension plan and a Funded Unapproved Retirement Benefits Scheme (FURBS). From 6 April 2006, contributions to the Executives’ money purchase plan are limited to the maximum level payable to a registered pension scheme without attracting an Annual Allowance charge (£215,000 in tax year 2006/07) with the excess paid as a cash sum to each Executive. The actual benefits payable from the pension plans will be based on the amount which has accumulated in that member’s money purchase accounts. 134 | Xstrata plc Annual Report 2006 Remuneration Report Such contributions are inclusive of any contributions from the relevant individuals. No employee contributions are currently payable for Mick Davis and Trevor Reid. As noted above, Santiago Zaldumbide receives no pension benefits under the terms of his fixed cost remuneration arrangement. External appointments Executive directors are not permitted to hold external directorships or offices without the approval of the Board. Santiago Zaldumbide, having gained the approval of the Board, held directorships with the following companies during the year: Asturiana de Zinc SA; Carburos Metalicos SA; Fertiberia SA and ThyssenKrupp SA. In total the remuneration received by Santiago Zaldumbide, in relation to his directorship of these companies, amounted to EUR67,409. Non-executive directors The level of fees for non-executive directors is set at the level considered necessary to obtain the services of individuals with the relevant skills and experience to bring added depth and breadth to the composition of the Board. Non-executive directors’ fees are reviewed annually by the Chairman and the Chief Executive in the light of fees payable to non-executive directors of comparable companies and the importance attached to the retention and attraction of high calibre individuals as non-executive directors. Non-executive directors are eligible to forgo all or part of their directors’ fees to acquire shares in the Group, after deduction of applicable income tax and social security contributions. The non-executive directors do not, and will not in the future, participate in the Bonus Plan or LTIP or any other performance-related incentive arrangements which may be introduced from time to time. Entitlements under service contracts Executive directors Mick Davis and Trevor Reid have employment agreements with Xstrata Services (UK) Limited (“XSL”) effective from 1 February 2002 which are for fixed terms of one year. However, their services as Chief Executive and Chief Financial Officer respectively are provided to the Group under a secondment agreement entered into between the Group and XSL on 19 March 2002. Each of Mick Davis and Trevor Reid is seconded to the Group for a fixed term of two years, thereafter renewable by either party for further periods of two years. The employment of Mick Davis and Trevor Reid may be terminated by not less than 12 months’ notice by XSL or the director concerned or by a payment in lieu of notice by XSL. On termination of employment by XSL in breach, or if Mr Davis or Mr Reid resigns in circumstances where they cannot in good faith be expected to continue in employment, each director is entitled to be paid a sum equal to 100% of his annual salary and his previous year’s bonus (plus any accrued basic salary and expenses) and to have all entitlements under his retirement benefit plans paid in accordance with the plan rules. As both Mr Davis and Mr Reid participate in defined contribution arrangements it is not expected that any significant additional liability would arise in respect of retirement plan entitlements beyond that already accrued in the accounts. For the purposes of calculating termination payments, annual bonus will be capped at 300% of annual salary. In addition, each of the executive directors is eligible to participate in the Bonus Plan which provides that deferred amounts up to an aggregate ceiling of 200% of salary remain payable in the event of cessation of employment by reason of death, injury, ill health or disability (in which case they are payable immediately) or retirement (in which case they are payable on the normal vesting date). No deferred amounts are payable in the event of cessation by dismissal for cause. In the case of termination by reason of death, injury, ill health or disability before the date the bonus is awarded for a financial year, or if the Remuneration Committee in its discretion so resolves, a proportion of the annual bonus pool may still be awarded subject to the normal discretion of the Remuneration Committee. Xstrata plc Annual Report 2006 | 135 Executive directors are entitled to any outstanding LTIP awards on cessation of employment by reason of death, injury, ill health or disability (in which case they are payable immediately in full) or retirement (in which case they are payable on the normal vesting date to the extent they vest for performance at that time). On termination of the agreement under which Santiago Zaldumbide receives a fixed fee for acting as Chairman of Asturiana, other than on his voluntary termination or termination for gross negligence, Santiago Zaldumbide is entitled to receive a sum from the redemption of an insurance policy acquired by Asturiana as described above. Santiago Zaldumbide is engaged as a director of Xstrata Plc on the terms of a letter of appointment dated 18 March 2002. Santiago Zaldumbide will receive no additional remuneration for his position as director of Xstrata Plc and is not entitled to any compensation in respect of the termination of his office as a director of Xstrata Plc. Non-executive directors Willy Strothotte is engaged by the Group as a Non-Executive director and Chairman on the terms of a letter of appointment. The appointment is for an initial fixed term of 36 months commencing on 25 February 2002 and terminable thereafter by six months notice by Willy Strothotte. The Group may terminate Willy Strothotte’s appointment at any time and on such termination Willy Strothotte will not be entitled to any compensation for loss of office. The term may be renewed by the Board. David Rough is engaged by the Group as the senior independent non-executive director and Deputy Chairman on the terms of a letter of appointment. The appointment is for an initial fixed term of 36 months commencing on 1 April 2002 and terminable thereafter by six months notice by David Rough. The Group may terminate David Rough’s appointment at any time and on such termination David Rough will not be entitled to any compensation for loss of office. The term may be renewed by the Board. David Issroff, Ivan Glasenberg, Paul Hazen, Robert MacDonnell, Frederik Roux, Sir Steve Robson and Ian Strachan are each engaged by the Group as a non-executive director on the terms of a letter of appointment. Each appointment is for an initial fixed term of 36 months commencing on 25 February 2002 (or on 8 May 2003 in the case of Ian Strachan) and terminable thereafter by six months notice by the non-executive director. David Issroff ceased to be a non-executive director with effect from 10 May 2006. The Group may terminate each non-executive director’s appointment at any time and on such termination the non-executive director will not be entitled to any compensation for loss of office. Each term may be renewed by the Board. There is no arrangement under which a director has agreed to waive future emoluments nor have there been any such waivers during the financial year. There are no outstanding loans or guarantees granted or provided by any member of the Group to or for the benefit of any of the directors. No significant awards have been made in the financial year to any past director. 136 | Xstrata plc Annual Report 2006 Remuneration Report Information subject to Audit Information for Remuneration Report – year ended 31 December 2006 Emoluments and compensation – amounts in US dollars ($) The emoluments and compensation in respect of qualifying services of each person who served as director during the year were as follows: Director Salary and fees1 US$ Bonus US$ Deferred bonus US$ Housing allowances US$ Health, life and private medical insurance US$ Other benefits US$ Total US$ Year ended 31 December 2005 Total US$ Executives Mick Davis Trevor Reid Santiago Zaldumbide Non-executives Willy Strothotte Paul Hazen David Issroff Robert MacDonnell Dr. Frederik Roux Ivan Glasenberg Sir Steve Robson CB David Rough Ian Strachan 1,843,0002 867,4872 1,041,7893 368,6004 134,5394 04 134,5394 152,9694 134,5394 165,8704 258,0204 165,8704 5,267,222 1,963,0005a 923,9705a 1,092,3865b 4,025,9045a* 1,860,0715a* 2,199,4185b* 183,0006a 141,6606b 0 230,9927 66,6288 13,2503 8,245,896 3,859,816 4,346,843 368,600 134,539 0 134,539 152,969 134,539 165,870 258,020 165,870 6,678,156 2,790,224 3,094,316 327,600 118,300 100,100 118,300 136,500 118,300 145,600 227,500 145,600 14,000,496 3,979,356 8,085,393 324,660 310,870 17,967,501 Notes 1. Salary and fees includes non-executive directors’ fees which may be paid in shares. 2. In 2006, Mick Davis’s and Trevor Reid’s salaries were set and paid in UK pounds sterling. The salary figures above have been converted to US dollars based on the average pound/dollar exchange rate for the year of 1.843 (2005: 1.820) and therefore reflect the impact of the exchange rate fluctuations during the year. 3. In 2006, Santiago Zaldumbide's basic salary and benefits were set and paid in Euros. The figures above have been converted to US dollars based on the average Euro/dollar exchange rate for the year of 1.256 (2005: 1.244) and therefore reflect the impact of the exchange rate fluctuations during the year. 4. All non-executive director fees were set and paid in UK pounds sterling, apart from those of Ian Strachan and Steve Robson, who were both set in UK pounds sterling, but paid in US dollars and Euros respectively. 5a. Bonuses were awarded and paid in UK pounds sterling and converted at a rate of 1.963, the exchange rate prevailing on the date of the award. 5b. Bonuses were awarded and paid in Euros and converted at a rate of 1.317, the exchange rate prevailing on the date of the award. 6a. In 2006, Mick Davis’s housing allowance was awarded and paid in US dollars. 6b. In 2006, Trevor Reid’s housing allowance was awarded in US dollars and paid in UK pounds sterling. 7. In 2006, Mick Davis’s benefits were set and paid in UK pounds sterling. The benefits been converted to US dollars based on the average pound/dollar exchange rate for the year of 1.843 (2005: 1.820) and therefore reflects the impact of the exchange rate fluctuations during the year. This includes an amount for life assurance of £112,002 and for medical insurance of £13,333. 8. In 2006, Trevor Reid’s benefits were set and paid in UK pounds sterling. The benefits have been converted to US dollars based on the average pound/dollar exchange rate for the year of 1.843 (2005: 1.820) and therefore reflects the impact of the exchange rate fluctuations during the year. 9. No consideration has been paid to or is receivable by third parties for making available the qualifying services of any directors during the year or in connection with the management affairs of Xstrata. *Deferred bonus payable in shares. The number of shares awarded will be determined by reference to the market value of the shares at the date the bonus payment was determined. Amount also includes $99,903.60, $12,130.20 and $14,646.68 in respect of dividend equivalents accrued during the year in respect of prior years’ deferred bonus awards which will vest on the date of the underlying award for Mick Davis, Trevor Reid and Santiago Zaldumbide respectively. Xstrata plc Annual Report 2006 | 137 Share options Details of share options of those directors who served during the year are as follows: Rights Issue Adjustment Lapsed / expired unexercised Earliest date of exercise At 1 Jan 2006 Awarded Exercised At 31 Dec 2006 Exercise price Expiry date Mick Davis Service Contract Arrangements Service Contract Arrangements LTIP Options LTIP Options Trevor Reid Service Contract Arrangements Service Contract Arrangements LTIP Options LTIP Options LTIP Options LTIP Options Santiago Zaldumbide LTIP Options LTIP Options LTIP Options LTIP Options 444,860 444,860 352,872 689,655 52,1377 52,1377 39,2887 80,8277 496,997 496,997 374,516 770,482 £3.847 1-Oct-05 1-Oct-12 1-Oct-13 10-Feb-13 8-Mar-14 17,644 £4.227 1-Oct-06 £3.227 10-Feb-06 £6.587 5-Mar-07 222,430 222,430 111,794 293,103 192,130 119,368 107,085 268,966 221,189 118,703 3,571,374 238,071 26,0687 26,0687 5,590 34,3517 22,5177 13,9897 5,355 31,5227 25,9237 13,9117 418,738 28,589 248,498 0 248,498 0 327,454 214,647 133,357 0 300,488 247,112 132,614 3,505,091 £3.697 15-Jan-06 15-Jan-13 15-Jan-14 10-Feb-13 8-Mar-14 11-Mar-15 10-Mar-16 10-Feb-13 8-Mar-14 11-Mar-15 10-Mar-16 106,204 £5.687 15-Jan-07 £3.60 10-Feb-06 £6.587 5-Mar-07 £9.497 11-Mar-08 £15.377 10-Mar-09 £3.60 10-Feb-06 £6.587 5-Mar-07 £9.497 11-Mar-08 £15.377 10-Mar-09 101,730 456,432 Notes 1. No options, other than the LTIP options, are subject to performance conditions as explained above. Details of the LTIP performance conditions are described above. 2. Mick Davis’ and Trevor Reid’s LTIP options may be settled in cash at the discretion of the Remuneration Committee. 3. The highest and lowest prices of the company's shares during the year were GBP25.55 and GBP12.17 respectively. (For 2005, taking into account the Rights Issue, the prices were GBP13.34 and GBP7.78 respectively, the prices before adjustment were GBP14.90 and GBP8.69 respectively). The price at the year end was GBP25.50 (for 2005 taking into account the Rights Issue, the price was GBP12.17, the price before adjustment was GBP 13.60). 4. On 14 December 2006, Trevor Reid exercised his option over 248,498 shares. The market value of an Xstrata share on the date of exercise was GBP24.53, and a gain of £5,178,698 was realised. 5. On 17 March 2006, Trevor Reid exercised his option over 106,204 shares. The market value of an Xstrata share on the date of exercise was GBP18.18, and a gain of £1,548,454 was realised. 6. On 2 March 2006, Santiago Zaldumbide exercised his option over 101,730 shares. The market value of an Xstrata share on the date of exercise was GBP17.86, and a gain of £1,450,670 was realised. 7. As a consequence of the rights issue, the number of options under Xstrata's schemes were adjusted by a factor of 1.1172 and the option price adjusted by a factor of 0.8951. It should be noted that the two LTIP option exercises during the year occurred before the Rights Issue and hence the exercise price in relation to these awards has not been adjusted. 138 | Xstrata plc Annual Report 2006 Remuneration Report Shares Details of the Company's ordinary shares over which those directors who served during the year have conditional rights under the LTIP are as follows: Director Scheme interest at 1 Jan 2006 Awarded Rights Issue Adjustment End of the period for qualifying conditions to be fulfilled Lapsed / Expired Vested At 31 Dec 2006 Mick Davis LTIP LTIP Added Value Plan – 2005 Cycle Added Value Plan – 2006 Cycle Deferred Bonus Deferred Bonus Deferred Bonus Trevor Reid LTIP LTIP LTIP LTIP Deferred Bonus Deferred Bonus Deferred Bonus Santiago Zaldumbide LTIP LTIP LTIP LTIP Deferred Bonus Deferred Bonus Deferred Bonus 113,880 206,897 * * 169,811 55,315 41,486 36,080 87,931 57,639 35,810 58,726 25,856 6,516 34,560 80,690 66,357 35,611 43,450 31,020 7,755 1,123,969 71,421 24,2483 19,9013 6,4823 4,8623 10-Feb-06 5-Mar-07 9-May-08 10-Mar-09 24-Feb-07 23-Feb-07 23-Feb-08 10-Feb-06 5-Mar-07 11-Mar-08 10-Mar-09 24-Feb-06 23-Feb-07 23-Feb-08 10-Feb-06 5-Mar-07 11-Mar-08 10-Mar-09 24-Feb-06 23-Feb-07 23-Feb-08 5,694 108,1864 0 231,145 189,712 61,797 46,348 1,804 34,2764 0 98,236 64,394 40,006 0 28,886 7,279 0 90,146 74,134 36,784 0 34,655 8,663 1,012,185 10,3053 6,7553 4,1963 3,0303 7633 58,7265 1,728 32,8324 9,4563 7,7773 4,1733 3,6353 9083 106,491 43,4505 9,226 277,470 Notes 1. Details of performance conditions are described above. 2. The market value of a share on the date of award under the LTIP and the Deferred Bonus on 10 March 2006 was GBP15.37 (pre-rights issue unadjusted price was GBP17.17). 3. As a consequence of the rights issue, the number of shares under Xstrata’s schemes were adjusted by a factor of 1.1172 and the share price adjusted by a factor of 0.8951. *During the year, Mick Davis was made an award under the Added Value Incentive Plan as described above. For the AVP 2006 cycle the participation percentage was 0.3% and the market capitalisation on date of award was GBP10,692,600,350. For the AVP 2005 cycle the participation percentage was 0.5% and the market capitalisation on the date of award was GBP6,026,084,544. No amount of shares awarded has been disclosed in the table above, as this award is not over a fixed number of shares, but is a plan which calculates a monetary award at the end of the performance period, which may then be settled in cash or by the award of shares. 4. These shares were awarded on 10 February 2003 when the market price was £5.39. The closing market price on the date of vesting was £17.57. 5. These shares were awarded on 10 February 2005 when the market price of shares was £10.37. The closing market price on the date of vesting was £17.57. Xstrata plc Annual Report 2006 | 139 Pensions Mick Davis and Trevor Reid have participated in defined contribution retirement benefit plans. During the year pension related payments of pension plan, FURBS, and non-pensionable salary supplement payments were made as follows: 2006 Mick Davis US$ 2005 Mick Davis US$ 2006 Trevor Reid US$ 2005 Trevor Reid US$ 2006 Total US$ 2005 Total US$ Pension related payments 1,822,233 1,961,746 785,433 1,282,445 2,607,666 3,244,191 Notes 1. Further details of the pension arrangements are explained above. 2. Santiago Zaldumbide received no pension benefits under the terms of his fixed cost remuneration arrangement which is detailed above. 3. Based on the average UK pound/US dollar exchange rate for the year of 1.843 (2005: 1.820). Payments to Mick Davis and Trevor Reid in both years were made in UK pounds sterling. 140 | Xstrata plc Annual Report 2006 Statement of Directors’ Responsibilities in relation to the Financial Statements of the Group The directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards as adopted by the European Union. The directors are required to prepare Group financial statements for each financial year which present fairly the financial position of the Group and the financial performance and cash flows of the Group for that period. In preparing those Group financial statements the directors are required to: I select suitable accounting policies in accordance with IAS 8: ‘Accounting Policies, Changes in Accounting Estimates and Errors’ and then apply them consistently; I present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; I provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance; and I state that the Group has complied with IFRSs, subject to any material departures disclosed and explained in the financial statements. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group financial statements comply with the Companies Act 1985 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Xstrata plc Annual Report 2006 | 141 Independent Auditors’ Report to the Shareholders of Xstrata plc We have audited the group financial statements of Xstrata plc for the year ended 31 December 2006 which comprise the group income statement, the group balance sheet, the group cash flow statement, the group statement of total recognised income and expense and the related notes 1 to 38. These group financial statements have been prepared under the accounting policies set out therein. We have reported separately on the parent company financial statements of Xstrata plc for the year ended 31 December 2006 and on the information in the remuneration report that is described as having been audited. This report is made solely to the company's members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the annual report and the group financial statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the group financial statements give a true and fair view and whether the group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the directors' report is consistent with the financial statements. In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by law regarding director’s remuneration and other transactions is not disclosed. We review whether the corporate governance statement reflects the company’s compliance with the nine provisions of the 2006 FRC Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures. We read other information contained in the annual report and consider whether it is consistent with the audited group financial statements. The other information comprises only the directors’ report, the chairman’s statement, the operating and financial review, the corporate governance statement and that part of the remuneration report which is unaudited. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the group financial statements. Our responsibilities do not extend to any other information. 142 | Xstrata plc Annual Report 2006 Independent Auditors’ Report to the Shareholders of Xstrata plc Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the group financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the group financial statements, and of whether the accounting policies are appropriate to the group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the group financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the group financial statements. Opinion In our opinion: I the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the group’s affairs as at 31 December 2006 and of its profit for the year then ended; I the group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and I the information given in the directors' report is consistent with the group financial statements. Ernst & Young LLP Registered auditor London, England 20 March 2007 Xstrata plc Annual Report 2006 | 143 Consolidated Income Statement For the year ended 31 December 2006 US$m Notes Before exceptional items Exceptional items† Total 2006 Before exceptional items Exceptional items† Total 2005 Revenue Cost of sales* Distribution costs Administrative expenses* Share of results from associates Acquisition costs Profit on sale of available for sale financial assets Profit on sale of operations Restructuring and closure costs Profit before interest, taxation, depreciation and amortisation Depreciation and amortisation: – Cost of sales – Administrative expenses Impairment of assets: – Cost of sales – Administrative expenses Profit before interest and taxation Finance income Finance costs Profit before taxation Income tax (expense)/benefit Profit from continuing operations Profit on sale of discontinued operations Profit for the year Attributable to: Equity holders of the parent Minority interests 10 10 10 20 10 10 10 10 17,632 (8,886) (1,141) (502) 4 – – – – 7,107 – – – – – – 63 16 (50) 29 – – – (1,378) (1,349) 170 (235) (1,414) 11 (1,403) – (1,403) (1,403) – (1,403) 17,632 (8,886) (1,141) (502) 4 – 63 16 (50) 7,136 (1,212) (32) – (1,378) 4,514 282 (881) 3,915 (1,563) 2,352 – 2,352 1,947 405 2,352 8,050 (3,880) (910) (180) 23 – – – – 3,103 (549) (29) (5) – 2,520 36 (128) 2,428 (551) 1,877 – 1,877 1,660 217 1,877 – – – – – (10) – – – (10) – – – – (10) 88 (44) 34 8 42 4 46 46 – 46 8,050 (3,880) (910) (180) 23 (10) – – – 3,093 (549) (29) (5) – 2,510 124 (172) 2,462 (543) 1,919 4 1,923 1,706 217 1,923 10 10 10 10 10 10 11 8 (1,212) (32) – – 5,863 112 (646) 5,329 (1,574) 3,755 – 3,755 3,350 405 3,755 Earnings per share (US$) – basic (continuing operations) – basic – diluted (continuing operations) – diluted Dividends (US$m) – declared and paid – proposed Dividend per share (US¢) – declared and paid – proposed 12 12 12 12 13 13 13 13 4.34 4.34 4.07 4.07 (1.82) (1.82) (1.68) (1.68) 2.52 2.52 2.39 2.39 251 281 34.0 30.0 2.42 2.42 2.20 2.20 0.06 0.07 0.06 0.07 2.48 2.49 2.26 2.27 154 150 22.4 22.4 †Exceptional items are significant items of income and expense, presented separately due to their nature or the expected infrequency of the events giving rise to them. *Before depreciation, amortisation and impairment charges. 144 | Xstrata plc Annual Report 2006 Consolidated Balance Sheet As at 31 December 2006 US$m Notes 2006 2005 Assets Non-current assets Intangible assets Property, plant and equipment Biological assets Inventories Trade and other receivables Investments in associates Available-for-sale financial assets Derivative financial assets Other financial assets Pension asset Prepayments Deferred tax assets Current assets Inventories Trade and other receivables Derivative financial assets Other financial assets Prepayments Cash and cash equivalents Total assets 14, 15 16 17 18 19 20 22 23 24 35 11 7,767 30,087 15 75 84 179 160 57 299 5 23 22 38,773 1,430 8,086 13 71 57 44 2,325 9 56 3 15 7 12,116 891 1,138 17 34 99 524 2,703 14,819 18 19 23 24 25 3,540 2,826 11 2 204 1,860 8,443 47,216 Xstrata plc Annual Report 2006 | 145 Consolidated Balance Sheet (continued) As at 31 December 2006 US$m Notes 2006 2005 Equity and liabilities Capital and reserves – attributable to equity holders of Xstrata plc Issued capital Share premium Own shares Convertible borrowings – equity component Other reserves Retained earnings Minority interests Total equity Non-current liabilities Trade and other payables Interest-bearing loans and borrowings Convertible borrowings Derivative financial liabilities Provisions Pension deficit Deferred tax liabilities Other liabilities Current liabilities Trade and other payables Interest-bearing loans and borrowings Derivative financial liabilities Provisions Income taxes payable Other liabilities Total liabilities Total equity and liabilities 26 26 26 26, 29 26 26 26 471 9,522 (154) 78 4,582 4,503 19,002 720 19,722 316 2,500 (616) 119 3,054 2,192 7,565 572 8,137 10 1,533 858 61 457 24 1,339 10 4,292 946 744 233 114 342 11 2,390 6,682 14,819 27 28 29 30 31 35 11 32 69 12,946 525 172 1,890 140 5,124 16 20,882 27 28 30 31 32 3,110 1,990 78 289 1,104 41 6,612 27,494 47,216 The financial statements on pages 143 to 250 were approved by the Board of Directors on 20 March 2007 and signed on its behalf by: Trevor Reid Chief Financial Officer 146 | Xstrata plc Annual Report 2006 Consolidated Cash Flow Statement For the year ended 31 December 2006 US$m Notes 2006 2005 Profit before taxation (continuing operations) Adjustments for: Profit before tax from discontinued operations Finance income Finance cost Share of results from associates Profit on sale of available-for-sale financial assets Profit on sale of discontinued operations Net profit on disposal of property, plant and equipment Impairment of assets Depreciation Amortisation Share-based compensation plans Increase in trade and other receivables Increase in other assets Increase in inventories Increase in trade and other payables Increase/(decrease) in provisions Other non-cash movements Cash generated from operations Income tax paid Interest paid Interest received Dividends received – associates Dividends received – other Net cash flow from operating activities Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Purchase of intangible assets Purchase of available-for-sale financial assets Proceeds from sale of available-for-sale financial assets Payments to joint venture partner Repayments from joint venture partner Acquisition of subsidiaries, net of cash acquired Acquisition of joint ventures, net of cash acquired Disposal of subsidiaries, net of cash disposed Net cash flow used in investing activities Issue of share capital Purchase of own shares Disposal of own shares Proceeds from interest bearing loans and borrowings Interest bearing loans and borrowings issue costs Repayment of interest bearing loans and borrowings Payment of finance lease liabilities Dividends paid to equity holders of the parent Dividends paid to minority interests Redemption of minority interests Net cash flow from/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Net foreign exchange difference Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December 3,915 8 10 10 20 10 8 10 10 10 10 – (282) 881 (4) (63) – (3) 1,378 1,221 23 91 (224) (154) (178) 159 (34) (20) 6,706 (1,022) (498) 87 10 3 5,286 (1,469) 32 (16) (3) 190 – – (17,064) (1,715) 24 (20,021) 6,684 (11) 1,134 22,807 (85) (14,035) (28) (251) (202) (95) 15,918 1,183 13 521 25 1,717 2,462 4 (124) 172 (23) – (4) (16) 5 571 7 31 (334) (80) (125) 236 8 (10) 2,780 (380) (116) 24 8 9 2,325 (858) 11 (9) (1,472) – (7) 7 (60) – 25 (2,363) – (522) 25 1,295 (17) (349) (8) (154) (148) – 122 84 (14) 451 521 10 Xstrata plc Annual Report 2006 | 147 Consolidated Statement of Recognised Income and Expenses For the year ended 31 December 2006 US$m 2006 2005 Income and expenses recognised directly in equity: Actuarial gains on defined benefit pension plans Gains on valuation of available-for-sale financial assets Reversal of revaluation surplus on available-for-sale financial assets Revaluation of property, plant and equipment Losses on cash flow hedges Foreign currency translation differences Transfers to the income statement: Losses on cash flow hedges Gains on sale of available-for-sale financial assets Recycled foreign currency translation net (gains)/losses Tax on items taken directly to or transferred from equity Net income/(expense) recognised directly in equity Profit for the year Total recognised income and expense for the year (refer to note 26) Attributable to: Equity holders of the parent Minority interests 71 1,892 (2,205) 1,528 (78) 244 1,452 125 (63) 47 1,561 15 1,576 2,352 3,928 1 398 – – (314) (581) (496) 128 – (67) (435) (6) (441) 1,923 1,482 3,523 405 3,928 1,268 214 1,482 148 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 1. Corporate Information The consolidated financial statements were authorised for issue in accordance with a Directors’ resolution on 20 March 2007. The ultimate parent entity of the Group, Xstrata plc, is a publicly traded limited company incorporated in England and Wales and domiciled in Switzerland. Its ordinary shares are traded on the London and Swiss stock exchanges. The principal activities of the Group are described in note 9. 2. Statement of compliance The accounting policies adopted are in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC), as adopted by the European Union, effective for the Group’s reporting for the year ended 31 December 2006. 3. Basis of preparation The consolidated financial statements are presented in US dollars, which is the parent’s functional and presentation currency, and all values are rounded to the nearest million except where otherwise indicated. The accounting policies in note 6 have been applied in preparing the financial statements. 4. Significant accounting judgements and estimates Estimates The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the year. Actual outcomes could differ from these estimates. The below are the most critical estimates and assumptions: Estimated recoverable reserves and resources Estimated recoverable reserves and resources are used to determine the depreciation of mine production assets, in accounting for deferred stripping costs and in performing impairment testing. Estimates are prepared by appropriately qualified persons, but will be impacted by forecast commodity prices, exchange rates, production costs and recoveries amongst other factors. Changes in assumptions will impact the carrying value of assets and depreciation and impairment charges recorded in the income statement. Environmental protection, rehabilitation and closure costs The provisions for environmental protection, rehabilitation and closure costs are based on estimated future costs using information available at the balance sheet date. To the extent the actual costs differ from these estimates, adjustments will be recorded and the income statement may be impacted. Impairment testing Note 15 outlines the significant assumptions made in performing impairment testing of goodwill and certain intangible assets. Similar assumptions are made when testing other non-current assets. Changes in these assumptions may alter the results of impairment testing and the resulting carrying values of assets. Defined benefit pension plans Note 35 outlines the significant assumptions made when accounting for defined benefit pension plans. Changes to these assumptions may alter the resulting accounting and ultimately the amount charged to the income statement. Xstrata plc Annual Report 2006 | 149 5. Changes in accounting policies, new standards and interpretations not applied Changes in accounting policies The accounting policies adopted are consistent with those of the previous year except as follows: The Group has adopted the following new and amended standards in the current year: IFRS 1 IFRS 4 & IAS 39 IFRS 6 IAS 21 IAS 39 IAS 39 ‘Amendments relating to IFRS 6’ ‘Amendments – Financial guarantee contracts’ ‘Amendments relating to IFRS 6’ ‘Amendments to IAS 21 – The effects of changes in foreign exchange rates – net investment in foreign operations’ ‘Amendment – Fair value option’ ‘Amendment – Cash flow hedge accounting for forecast intra-group transactions’ Adoption of the above new standards and amendments did not have a material impact on the financial statements. The Group has also early adopted the following IFRIC interpretations: IFRIC 8 IFRIC 9 ‘Scope of IFRS 2’ ‘Re-assessment of embedded derivatives’ These interpretations did not have a material impact on the financial statements. New standards and interpretations not applied The IASB and IFRIC have issued the following standards and interpretations with an effective date after the date of these financial statements, consequently these pronouncements will impact the Group in future periods. Effective date IFRS 7 IFRS 8 IAS 1 IFRIC 7 IFRIC 10 IFRIC 11 ‘Financial instrument disclosures’ ‘Operating segments’ ‘Amendment: Capital disclosures’ ‘Applying the restatement approach under IAS 29’ ‘Interim financial reporting and impairment’ ‘Group and treasury share transactions’ 1 January 2007 1 January 2009 1 January 2007 1 March 2006 1 November 2006 1 March 2007 The Directors do not anticipate that the adoption of these standards and interpretations on their effective dates will have a material impact on the Group’s financial statements in the period of initial application. Upon adoption of IFRS 7, the Group will have to disclose additional information about its financial instruments, their significance and the nature and extent of risks that they give rise to. More specifically the Group will need to disclose the fair value of its financial instruments and its risk exposure in greater detail. There will be no impact on income or net assets. Upon adoption of IFRS 8, the Group will be required to disclose segment information based on the information management uses for internally evaluating the performance of operating segments and allocating resources to those segments. This information may be different from that reported in the balance sheet and income statement but the Group will provide an explanation for such differences. There will be no impact on the income or net assets. 150 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 6. Principal Accounting Policies Basis of consolidation The financial statements consolidate the financial statements of Xstrata plc (the Company) and its subsidiaries (the Group). All inter-entity balances and transactions, including unrealised profits and losses arising from intra-group transactions, have been eliminated in full. The results of subsidiaries acquired or sold are consolidated for the periods from or to the date on which control passes. Control is achieved where the Group has the power to govern the financial and operating policy of an entity so as to obtain benefits from its activities. Where there is a loss of control of a subsidiary, the financial statements include the results for the part of the reporting period during which Xstrata plc has control. Subsidiaries use the same reporting period and same accounting policies as Xstrata plc. Interests in Joint Ventures A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. The financial statements of the joint ventures are prepared for the same reporting period as the Company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. Jointly controlled operations A jointly controlled operation involves the use of assets and other resources of the Group and other venturers rather than the establishment of a corporation, partnership or other entity. The Group accounts for the assets it controls and the liabilities it incurs, the expenses it incurs and the share of income that it earns from the sale of goods or services by the joint venture. Jointly controlled assets A jointly controlled asset involves joint control and offers joint ownership by the Group and other venturers of assets contributed to or acquired for the purpose of the joint venture, without the formation of a corporation, partnership or other entity. The Group accounts for its share of the jointly controlled assets, any liabilities it has incurred, its share of any liabilities jointly incurred with other ventures, income from the sale or use of its share of the joint venture’s output, together with its share of the expenses incurred by the joint venture, and any expenses it incurs in relation to its interest in the joint venture. Jointly controlled entities A jointly controlled entity involves the establishment of a corporation, partnership or other legal entity in which the Group has an interest along with other venturers. The Group recognises its interest in jointly controlled entities using the proportionate method of consolidation whereby the Group’s share of each of the assets, liabilities, income and expenses of the joint venture are combined with the similar items, line by line, in its consolidated financial statements. When the Group contributes or sells assets to a joint venture, any portion of gain or loss from the transaction is recognised based on the substance of the transaction. When the Group has transferred the risk and rewards of ownership to the joint venture, the Group only recognises the portion of the gain or loss attributable to the other venturers, unless the loss is reflective of an impairment, in which case the loss is recognised in full. When the Group purchases assets from the joint venture, it does not recognise its share of the profits of the joint venture from the transaction until it resells the assets to an independent party. Losses are accounted for in a similar manner unless they represent an impairment loss, in which case they are recognised immediately. Joint ventures are accounted for in the manner outlined above, until the date on which the Group ceases to have joint control over the joint venture. Xstrata plc Annual Report 2006 | 151 6. Principal Accounting Policies (continued) Investments in Associates Entities in which the Group has significant influence and which are neither subsidiaries nor joint ventures, are associates, and are accounted for under the equity method of accounting. Under the equity method of accounting, the investment in the associate is recognised on the balance sheet on the date of acquisition at the fair value of the purchase consideration and therefore includes any goodwill on acquisition. The carrying amount is adjusted by the Group’s share of the post acquisition profit or loss; depreciation, amortisation or impairment arising from fair value adjustments made at date of acquisition and certain inter-entity transactions together with a reduction for any dividends received or receivable from the associate. Where there has been a change recognised directly in the equity of the associate, the Group recognises its share of such changes in equity. The financial statements of the associates are prepared for the same reporting period as the Company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. Adjustments are made in the consolidated financial statements to eliminate the Group’s share of unrealised gains and losses on transactions between the Group and its associates. The Group discontinues its use of the equity method from the date on which it ceases to have significant influence, and from that date, accounts for the investment in accordance with IAS 39 (with its initial cost being the carrying amount of the associate at that date), provided the investment does not then qualify as a subsidiary or joint venture. The Group’s income statement reflects the share of associates’ results after tax and the Group’s statement of recognised income and expense includes any amounts recognised by associates outside of the income statement. Business Combinations Business combinations after 1 January 2004, are accounted for in accordance with the below policy. Business combinations that occurred prior to this date have been accounted for in accordance with the Group’s UK GAAP accounting policy at the time of the combination. On the acquisition of a subsidiary, the purchase method of accounting is used whereby the purchase consideration is allocated to the identifiable assets, liabilities and contingent liabilities (identifiable net assets) on the basis of fair value at the date of acquisition. Those mineral reserves and resources that are able to be reliably valued are recognised in the assessment of fair values on acquisition. Other potential reserves, resources and mineral rights, for which in the Directors’ opinion, values cannot be reliably determined, are not recognised. When the cost of acquisition exceeds the fair values attributable to the Group’s share of the identifiable net assets the difference is treated as purchased goodwill, which is not amortised but is reviewed for impairment annually or where there is an indication of impairment. If the fair value attributable to the Group’s share of the identifiable net assets exceeds the cost of acquisition the difference is immediately recognised in the income statement. Minority interests represent the portion of profit or loss and net assets in subsidiaries that are not held by the Group and are presented in equity in the consolidated balance sheet, separately from the parent shareholders equity. When a subsidiary is acquired in a number of stages, the cost of each stage is compared with the fair value of the identifiable net assets at the date of that purchase. Any excess is treated as goodwill, or any discount is immediately recognised in the income statement. On the date control is obtained, the identifiable net assets are recognised in the Group balance sheet at fair value and the difference between the fair value recognised and the value on the date purchase is recognised in the asset revaluation reserve. Similar procedures are applied in accounting for the purchases of interests in associates. Any goodwill arising on such purchases is included within the carrying amount of the investment in the associates, but not thereafter amortised. Any excess of the Group’s share of the net fair value of the associate’s identifiable assets, liabilities and contingent liabilities over the cost of the investment is included in income in the period of the purchase. 152 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 6. Principal Accounting Policies (continued) Foreign currencies Financial statements of subsidiaries, joint ventures and associates, are maintained in their functional currencies and converted to US dollars for consolidation of the Group results. The functional currency of each entity is determined after consideration of the primary economic environment of the entity. Transactions in foreign currencies are translated at the exchange rates ruling at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at year end exchange rates. All differences that arise are recorded in the income statement. Non-monetary assets measured at historical cost in a foreign currency are translated using the exchange rates at the date of the initial transactions. Where non-monetary assets are measured at fair value in a foreign currency, they are translated at the exchange rates when the fair value was determined. Where the exchange difference relates to an item which has been recorded in equity, the related exchange difference is also recorded in equity. On consolidation of foreign operations into US dollars, income statement items are translated at weighted average rates of exchange where this is a reasonable approximation of the exchange rate at the dates of the transactions. Balance sheet items are translated at closing exchange rates. Exchange differences on the re-translation of the investments in foreign subsidiaries, joint ventures and associates at closing rates, together with differences between income statements translated at average and at closing rates, are recorded in a separate component of equity. Exchange differences relating to quasi equity inter-company loan balances with the foreign operations which form part of the net investment in the foreign operation are also recognised in this component of equity. On disposal or partial disposal of a foreign entity or on repayment of loans forming part of the net investment in the foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement. Exchange differences on foreign currency borrowings to finance net investments and tax charges/credits attributable to those exchange differences are also recorded in a separate component of equity to the extent that the hedge is effective. Upon full or partial disposal or repayment of the net investment in the foreign operation (including loans that form part of the net investment), the cumulative amount of the exchange differences is recognised in the income statement when the gain or loss on disposal or on loan repayment is recognised. The following exchange rates to the US dollar (US$) have been applied: 31 December 2006 Average 12 months 2006 31 December 2005 Average 12 months 2005 Argentine pesos (US$:ARS) Australian dollars (AUD:US$) Canadian dollars (US$:CAD) Chilean pesos (US$:CLP) Colombian pesos (US$:COP) Euros (EUR:US$) Great Britain pounds (GBP:US$) Peruvian nuevo sol (US$:PEN) South African rand (US$:ZAR) Swiss francs (US$:CHF) 3.0610 0.7886 1.1659 532.32 2,240.00 1.3200 1.9589 3.1950 7.0061 1.2190 3.0745 0.7535 1.1342 530.54 2,359.39 1.2566 1.8437 3.2737 6.7701 1.2529 3.0300 0.7328 1.1620 n/a n/a 1.1850 1.7229 n/a 6.3288 1.3134 2.9224 0.7624 1.2113 n/a n/a 1.2444 1.8195 n/a 6.3661 1.2463 Xstrata plc Annual Report 2006 | 153 6. Principal Accounting Policies (continued) Revenue Revenue associated with the sale of commodities is recognised when all significant risks and rewards of ownership of the asset sold are transferred to the customer, usually when insurance risk has passed to the customer and the commodity has been delivered to the shipping agent. Sales revenue is recognised at the fair value of consideration received, which in most cases is invoiced amounts, with most sales being priced free on board (FOB), free on rail (FOR) or cost, insurance and freight (CIF). Revenues from the sale of by-products are also included in sales revenue. Revenue is recognised, at fair value of the consideration receivable, to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. Revenue excludes treatment and refining charges unless payment of these amounts can be enforced by the Group at the time of the sale. For some commodities the sales price is determined provisionally at the date of sale, with the final price determined at a mutually agreed date, generally at a quoted market price at that time. In order to ensure that revenue is recorded at the fair value of consideration to be received, adjustments are made to the invoice price based on the forward metal prices published at the balance sheet date. Interest income Interest income is recognised as earned on an accruals basis using the effective interest method in the income statement. Exceptional items Exceptional items represent significant items of income and expense which due to their nature or the expected infrequency of the events giving rise to them, are presented separately on the face of the income statement to give a better understanding to shareholders of the elements of financial performance in the year, so as to facilitate comparison with prior periods and to better assess trends in financial performance. Exceptional items include, but are not limited to, goodwill impairments, acquisition and integration costs which have not been capitalised, profits and losses on the sale of investments, profits and losses from the sale of operations, recycled gains and losses from the foreign currency translation reserve, foreign currency gains and losses on borrowings, restructuring and closure costs, loan issue costs written-off on facility refinancing and the related tax impacts of these items. Property, plant and equipment Land and buildings, plant and equipment On initial acquisition, land and buildings, plant and equipment are valued at cost, being the purchase price and the directly attributable costs of acquisition or construction required to bring the asset to the location and condition necessary for the asset to be capable of operating in the manner intended by management. In subsequent periods, buildings, plant and equipment are stated at cost less accumulated depreciation and any impairment in value, whilst land is stated at cost less any impairment in value and is not depreciated. Depreciation is provided so as to write off the cost, less estimated residual values of buildings, plant and equipment (based on prices prevailing at the balance date) on the following bases: Mine production assets are depreciated using a unit of production method based on estimated economically recoverable reserves, which results in a depreciation charge proportional to the depletion of reserves. Buildings, plant and equipment unrelated to production are depreciated using the straight-line method based on estimated useful lives. Where parts of an asset have differing useful lives, depreciation is calculated on each separate part. Each item or part’s estimated useful life has due regard to both its own physical life limitations and the present assessment of economically recoverable reserves of the mine property at which the item is located, and to possible future variations in those assessments. Estimates of remaining useful lives and residual values are reviewed annually. Changes in estimates which affect unit of production calculations are accounted for prospectively. 154 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 6. Principal Accounting Policies (continued) The expected useful lives are as follows: Buildings Plant and Equipment Furniture and Fixtures Other 15 – 40 4 – 30 5 – 15 3–5 years years years years The net carrying amounts of land, buildings, plant and equipment are reviewed for impairment either individually or at the cash-generating unit level when events and changes in circumstances indicate that the carrying amount may not be recoverable. To the extent that these values exceed their recoverable amounts, that excess is fully provided against in the financial year in which this is determined. Expenditure on major maintenance or repairs includes the cost of replacement of parts of assets and overhaul costs. Where an asset or part of an asset is replaced and it is probable that future economic benefits associated with the item will be available to the Group, the expenditure is capitalised and the carrying amount of the item replaced derecognised. Similarly, overhaul costs associated with major maintenance are capitalised and depreciated over their useful lives where it is probable that future economic benefits will be available and any remaining carrying amounts of the cost of previous overhauls are derecognised. All other costs are expensed as incurred. Where an item of property, plant and equipment is disposed of, it is derecognised and the difference between its carrying value and net sales proceeds is disclosed as a profit or loss on disposal in the income statement. Any items of property, plant or equipment that cease to have future economic benefits expected to arise from their continued use or disposal are derecognised with any gain or loss included in the income statement in the financial year in which the item is derecognised. Exploration and evaluation expenditure Exploration and evaluation expenditure relates to costs incurred on the exploration and evaluation of potential mineral reserves and includes costs such as exploratory drilling and sample testing and the costs of pre-feasibility studies. Exploration and evaluation expenditure for each area of interest, other than that acquired from the purchase of another mining company, is carried forward as an asset provided that one of the following conditions is met: – – such costs are expected to be recouped in full through successful development and exploration of the area of interest or alternatively, by its sale; or exploration and evaluation activities in the area of interest have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in relation to the area are continuing, or planned for the future. Purchased exploration and evaluation assets are recognised as assets at their cost of acquisition or at fair value if purchased as part of a business combination. An impairment review is performed, either individually or at the cash-generating unit level, when there are indicators that the carrying amount of the assets may exceed their recoverable amounts. To the extent that this occurs, the excess is fully provided against, in the financial period in which this is determined. Exploration assets are reassessed on a regular basis and these costs are carried forward provided that at least one of the conditions outlined above is met. Expenditure is transferred to mine development assets or capital work in progress once the work completed to date supports the future development of the property and such development receives appropriate approvals. Xstrata plc Annual Report 2006 | 155 6. Principal Accounting Policies (continued) Mineral properties and mine development expenditure The cost of acquiring mineral reserves and mineral resources is capitalised on the balance sheet as incurred. Capitalised costs (development expenditure) include interest and financing costs relating to the construction of plant and equipment and costs associated with a start up period where the asset is available for use but incapable of operating at normal levels without a commissioning period. Mineral reserves and capitalised mine development expenditure are, upon commencement of production, depreciated using a unit of production method based on the estimated economically recoverable reserves to which they relate or are written off if the property is abandoned. The net carrying amounts of mineral reserves and resources and capitalised mine development expenditure at each mine property are reviewed for impairment either individually or at the cash-generating unit level when events and changes in circumstances indicate that the carrying amount may not be recoverable. To the extent that these values exceed their recoverable amounts, that excess is fully provided against in the financial year in which this is determined. Capital work in progress Assets in the course of construction are capitalised in the capital work in progress account. On completion, the cost of construction is transferred to the appropriate category of property, plant and equipment. The cost of property, plant and equipment comprises its purchase price and any costs directly attributable to bringing it into working condition for its intended use. Costs associated with a start up period are capitalised where the asset is available for use but incapable of operating at normal levels without a commissioning period. Capital work in progress is not depreciated. The net carrying amounts of capital work in progress at each mine property are reviewed for impairment either individually or at the cashgenerating unit level when events and changes in circumstances indicate that the carrying amount may not be recoverable. To the extent that these values exceed their recoverable amounts, that excess is fully provided against in the financial period in which this is determined. Leasing and hire purchase commitments The determination of whether an arrangement is, or contains a lease is based in the substance of the arrangement at inception date, including whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or whether the arrangement conveys a right to use the asset. A reassessment after inception is only made in specific circumstances. Assets held under finance leases, where substantially all the risks and rewards of ownership of the asset have passed to the Group, and hire purchase contracts are capitalised in the balance sheet at the lower of the fair value of the leased property or the present value of the minimum lease payments during the lease term calculated using the interest rate implicit in the lease agreement. These amounts are determined at the inception of the lease and are depreciated over the shorter of their estimated useful lives or lease term. The capital elements of future obligations under leases and hire purchase contracts are included as liabilities in the balance sheet. The interest elements of the lease or hire purchase obligations are charged to the income statement over the periods of the leases and hire purchase contracts and represent a constant proportion of the balance of capital repayments outstanding. Leases where substantially all the risks and rewards of ownership have not passed to the Group are classified as operating leases. Rentals payable under operating leases are charged to the income statement on a straight-line basis over the lease term. Deferred stripping costs In open pit mining operations, it is necessary to remove overburden and other waste in order to access the ore body. During the pre-production phase, these costs are capitalised as part of the cost of the mine property and depreciated based on the mine’s strip ratio (refer below). The costs of removal of the waste material during a mine’s production phase are deferred, where they give rise to future benefits. The deferral of these costs, and subsequent charges to the income statement are determined with reference to the mine’s strip ratio. 156 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 6. Principal Accounting Policies (continued) The mine’s strip ratio represents the ratio of the estimated total volume of waste, to the estimated total quantity of economically recoverable ore, over the life of the mine. These costs are deferred where the actual stripping ratios are higher than the average life of mine strip ratio. The costs charged to the income statement are based on application of the mine’s strip ratio to the quantity of ore mined in the period. Where the ore is expected to be evenly distributed, waste removal is expensed as incurred. Biological assets Biological assets, being cattle, are carried at their fair value less estimated selling costs. Any changes in fair value less estimated selling costs are included in the income statement in the period in which they arise. Intangible assets Purchased intangible assets are recorded at the cost of acquisition including expenses incidental to the acquisition, less accumulated amortisation and any impairment in value. Intangible assets acquired as part of an acquisition of a business are capitalised separately from goodwill if the asset is separable or arises from contractual or legal rights, and the fair value can be measured reliably on initial recognition. Internally generated goodwill is not recognised. Intangible assets are amortised using a straight-line method based on estimated useful lives, except goodwill and those intangible assets which the Directors regard as having indefinite useful lives, which are not amortised but are reviewed for impairment at least annually, and whenever events or circumstances indicate that the carrying amount may not be recoverable. Intangible assets are regarded as having an indefinite life when, based on an analysis of all the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash flows. Such analyses are performed annually. Estimated useful lives are determined as the period over which the Group expects to use the asset or the number of production (or similar) units expected to be obtained from the asset by the Group and for which the Group retains control of access to those benefits. For intangible assets with a finite useful life, the amortisation method and period are reviewed annually and impairment testing is undertaken when circumstances indicate the carrying amount may not be recoverable. Where an intangible asset is disposed of, it is derecognised and the difference between its carrying value and the net sales proceeds is reported as a profit or loss on disposal in the income statement. Coal export rights Coal export rights are carried at cost and are considered to have an indefinite useful life. As a result they are not amortised but are subject to an asset impairment review at least annually and more regularly if indicators of impairment exist. Software and technology patents Software and technology patents are carried at cost and amortised over a period of 3 years and 20 years respectively. Impairment of assets The carrying amounts of non-current assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amounts may not be recoverable. If there are indicators of impairment, a review is undertaken to determine whether the carrying amounts are in excess of their recoverable amounts. An asset’s recoverable amount is determined as the higher of its fair value less costs to sell and its valuein-use. Such review is undertaken on an asset by asset basis, except where such assets do not generate cash flows independent of other assets, in which case the review is undertaken at the cash-generating unit level. Where a cash-generating unit, or group of cash-generating units, has goodwill allocated to it, or includes intangible assets which are either not available for use or which have an indefinite useful life (and which can only be tested as part of a cash-generating unit), an impairment test is performed at least annually or whenever there is an indication that the carrying amounts of such assets may be impaired. If the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recorded in the income statement to reflect the asset at the lower amount. In assessing the recoverable amount of assets, the relevant future cash flows expected to arise from the continuing use of such assets and from their disposal are discounted to their present value using a market-determined pre-tax discount rate which reflects current market assessments of the time value of money and asset-specific risks for which the cash flow estimates have not been adjusted. Xstrata plc Annual Report 2006 | 157 6. Principal Accounting Policies (continued) An impairment loss is reversed in the income statement if there is a change in the estimates used to determine the recoverable amount since the prior impairment loss was recognised. The carrying amount is increased to the recoverable amount but not beyond the carrying amount net of depreciation or amortisation which would have arisen if the prior impairment loss had not been recognised. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. Goodwill impairments are not reversed. Non-current assets held for sale and discontinued operations Non-current assets held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the assets or disposal groups are available for immediate sale in their present condition. The Group must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year of the date of classification. Non-current assets (or disposal groups) held for sale are carried at the lower of the carrying amount prior to being classified as held for sale, and the fair value less costs to sell. A non-current asset is not depreciated while classified as held for sale. A non-current asset held for sale is presented separately in the balance sheet. The assets and liabilities of a disposal group classified as held for sale are presented separately as one line in the assets and liabilities sections on the face of the balance sheet. Discontinued Operations A discontinued operation is a component of an entity whose operations and cash flows are clearly distinguished, operationally and for financial reporting purposes from the rest of the entity, that has been disposed of or classified as held for sale. To be classified as a discontinued operation one of the following criteria must be met: – – – the operation must represent a separate major line of business or geographical area of operations; or the operation must be part of a single coordinated plan to dispose of a separate major line of business or geographical areas of operations; or the operation must be a subsidiary acquired exclusively with a view for resale. Where the operation is discontinued at the balance sheet date, the results are presented in one line on the face of the income statement, and prior period results are represented as discontinued. Financial instruments The Group applied the below accounting policies from 1 January 2005. Prior to this time the Group accounted for financial instruments in accordance with UK GAAP. Investments and other financial assets Financial assets are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments or available-for-sale financial assets, as appropriate. The Group determines the classification of its financial assets at initial recognition. Where as a result of a change in intention or ability, it is no longer appropriate to classify an investment as held to maturity, the investment is reclassified into the available-for-sale category. When financial assets are recognised initially, they are measured at fair value on the trade date, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. Financial assets at fair value through profit or loss Financial assets classified as held for trading are included in the category ‘financial assets at fair value through profit or loss’. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated as and are effective hedging instruments. Other assets can be designated to this category on initial recognition. Gains or losses on these items are recognised in income. 158 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 6. Principal Accounting Policies (continued) Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this classification. Other long term investments that are intended to be held-to-maturity, such as bonds, are subsequently measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised in income when the investments are derecognised or impaired, as well as through the amortisation process. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have not been designated as either fair value through profit and loss or available-for-sale. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in income when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition available-for sale financial assets are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the income statement. Listed share investments are carried at fair value based on stock exchange quoted prices at the balance sheet date. Unlisted shares are carried at fair value where it can be reliably obtained, otherwise they are stated at cost less any impairment. Trade and other receivables Trade and other receivables are recognised and carried at their original invoiced value or their recoverable amount if this differs from the invoiced amount. Where the time value of money is material, receivables are carried at amortised cost. A provision is made where the estimated recoverable amount is lower than the carrying amount. Fair values The fair value of quoted financial assets is determined by reference to bid prices at the close of business on the balance sheet date. Where there is no active market, fair value is determined using valuation techniques. These include recent arm’s length market transactions; reference to current market value of another instrument which is substantially the same; discounted cash flow analysis and pricing models. Derivative financial instruments are valued using applicable valuation techniques such as those outlined above. Derecognition of financial assets and liabilities Financial assets A financial asset is derecognised where: – – – the rights to receive cash flows from the asset have expired; the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; or the Group has transferred its rights to receive cash flows from the asset and either has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, it continues to recognise the financial asset to the extent of its continuing involvement in the asset. Xstrata plc Annual Report 2006 | 159 6. Principal Accounting Policies (continued) Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Gains on derecognition are recognised within finance income and losses within finance costs. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement. Impairment of financial assets The Group assesses at each balance sheet date whether a financial asset is impaired. Financial assets carried at amortised cost If there is objective evidence that an impairment loss on loans and receivables and held to maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (ie the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced and the amount of the loss is recognised in the income statement. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. Assets carried at cost If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value (because its fair value cannot be reliably measured), the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Available-for-sale financial assets If an available-for-sale financial asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in profit or loss, is transferred from equity to the income statement. Reversals in respect of equity instruments classified as available-for-sale are not recognised in profit. Reversals of impairment losses on debt instruments are reversed through profit or loss, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in profit or loss. Rehabilitation Trust Fund Investments in the rehabilitation trust funds are measured at fair value based on the market price of investments held by the trust. In accordance with IFRIC 5, movements in the fair value are recognised in the income statement. Such amounts relate to trusts in South Africa which receive cash contributions to accumulate funds for the Group’s rehabilitation liability relating to the eventual closure of the Group’s coal operations. Derivative financial instruments and hedging The Group uses derivative financial instruments such as interest rate swaps, forward currency and commodity contracts to hedge its risks associated with interest rate, foreign currency and price fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are taken directly to profit or loss for the year. The fair value of forward currency and commodity contracts is calculated by reference to current forward exchange rates and prices for contracts with similar maturity profiles. The fair value of interest rate swap contracts is determined by reference to market values for similar instruments. 160 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 6. Principal Accounting Policies (continued) For the purpose of hedge accounting, hedges are classified as: – – – fair value hedges; cash flow hedges; or hedges of a net investment in a foreign operation. At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Hedges which meet the strict criteria for hedge accounting are accounted for as follows: Fair value hedges Fair value hedges are hedges of the Group’s exposure to changes in the fair value of a recognised asset or liability that could affect profit or loss. The carrying amount of the hedged item is adjusted for gains and losses attributable to the risk being hedged, the derivative is re-measured at fair value and gains and losses from both are taken to profit or loss. For fair value hedges relating to items carried at amortised cost, the adjustment to carrying value is amortised through profit or loss over the remaining term to maturity. Any adjustment to the carrying amount of a hedged financial instrument for which the effective interest method is used is amortised to profit or loss. Amortisation begins when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation. Cash flow hedges Cash flow hedges are a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in profit or loss. Amounts taken to equity are transferred to the income statement when the hedged transaction affects profit or loss. Where the hedged item is the cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction is no longer expected to occur, amounts previously recognised in equity are transferred to profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction occurs. If the related transaction is not expected to occur, the amount is taken to profit or loss. Hedges of a net investment Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised directly in equity while any gains or losses relating to the ineffective portion are recognised in profit or loss. On disposal of the foreign operation, the cumulative value of any such gains or losses recognised directly in equity is transferred to profit or loss. Own shares The cost of purchases of own shares held by the Employee Share Ownership Plan (ESOP) trust are deducted from equity. Where they are issued to employees or sold, no gain or loss is recognised in the income statement. Any proceeds received on disposal of the shares or transfer to employees are also recognised in equity. Xstrata plc Annual Report 2006 | 161 6. Principal Accounting Policies (continued) Own shares purchased under the Equity Capital Management Program (ECMP) are deducted from equity. No gain or loss is recognised in the income statement on the purchase, sale, issue or cancellation of such shares. Such gains and losses are recognised directly in equity. Interest-bearing loans and borrowings Loans are recognised at inception at fair value of the proceeds received, net of directly attributable transaction costs. Subsequently they are measured at amortised cost using the effective interest method. Finance costs are recognised in the income statement using the effective interest method. Convertible borrowings On issue of a convertible borrowing, the fair value of the liability component is determined by discounting the contractual future cash flows using a market rate for a non-convertible instrument with similar terms. This value is carried as a liability on the amortised cost basis until extinguished on conversion or redemption. The remainder of the proceeds is allocated to a separate component of equity, net of issue costs, which remains constant in subsequent periods. Issue costs are apportioned between the liability and equity components based on their respective carrying amounts when the instrument was issued. On conversion, the liability is reclassified to equity and no gain or loss is recognised in the profit or loss. Where the convertible borrowing is redeemed early or repurchased in a way that does not alter the original conversion privileges, the consideration paid is allocated to the liability and equity components. The consideration relating to the equity component is recognised in equity and the amount of gain or loss relating to the liability element in profit or loss. The finance costs recognised in respect of the convertible borrowings includes the accretion of the liability component to the amount that will be payable on redemption. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined on a weighted average basis or using first-in-first-out basis and includes all costs incurred in the normal course of business including direct material and direct labour costs, and an allocation of production overheads, depreciation and amortisation and other costs, based on normal production capacity, incurred in bringing each product to its present location and condition. Cost of inventories includes the transfers from equity of gains and losses on qualifying cash flow hedges in respect of the purchase of materials. Inventories are categorised, as follows: – – – Raw materials and consumables: Materials, goods or supplies (including energy sources) to be either directly or indirectly consumed in the production process. Work in progress: Items stored in an intermediate state that have not yet passed through all the stages of production. Finished goods: Products and materials that have passed all stages of the production process. Net realisable value represents estimated selling price in the ordinary course of business less any further costs expected to be incurred to completion and disposal. Cash and cash equivalents Cash and cash equivalents comprise cash at bank, cash in hand and short term deposits with an original maturity of 3 months or less. For the cash flow statement, cash and cash equivalents include certain bank overdrafts where the facility forms part of the working capital cash management activities. Government grants Government grants are recognised where there is reasonable assurance that the grant will be received and all the attaching conditions will be complied with. Government grants in respect of capital expenditure are credited to the carrying amount of the related asset and are released to the income statement over the expected useful lives of the relevant assets. Grants which are not associated with an asset are credited to income so as to match them with the expense to which they relate. 162 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 6. Principal Accounting Policies (continued) Environmental protection, rehabilitation and closure costs Provision is made for close down, restoration and for environmental rehabilitation costs (which include the dismantling and demolition of infrastructure, removal of residual materials and remediation of disturbed areas) in the financial period when the related environmental disturbance occurs, based on the estimated future costs using information available at the balance sheet date. The provision is discounted using a current market-based pre-tax discount rate and the unwinding of the discount is included in interest expense. At the time of establishing the provision, a corresponding asset is capitalised, where it gives rise to a future benefit, and depreciated over future production from the operations to which it relates. The provision is reviewed on an annual basis for changes to obligations or legislation or discount rates that effect change in cost estimates or life of operations. The cost of the related asset is adjusted for changes in the provision resulting from changes in the estimated cash flows or discount rate, and the adjusted cost of the asset is depreciated prospectively. Rehabilitation trust funds holding monies committed for use in satisfying environmental obligations are included within Other financial assets on the balance sheet. Employee Entitlements Provisions are recognised for short term employee entitlements, on an undiscounted basis, for services rendered by employees that remain unpaid at the balance sheet date. Provisions for long term employee entitlements are measured using the projected unit credit method and discounted at an interest rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the liabilities. In some of the Group’s Australian operations, long service leave (an employee entitlement for which a provision is recorded) is administered by an independent fund. The fund collects levies from employers throughout the industry based on the expected cost of future liabilities. When the Group makes long service leave payments to employees covered by the fund, it is reimbursed for the majority of the payment. To reflect the expected reimbursement for future long service leave payments from the fund, a receivable is recorded based on the present value of the future amounts expected to be reimbursed. Other Provisions Provisions are recognised when the Group has a present obligation (legal or constructive), as result of past events, and it is probable that an outflow of resources that can be reliably estimated will be required to settle the obligation. Where the effect is material, the provision is discounted to net present value using an appropriate current market-based pre-tax discount rate and the unwinding of the discount is included in finance costs. Taxation Current tax Current tax for each taxable entity in the Group is based on the local taxable income at the local statutory tax rate enacted or substantively enacted at the balance sheet date and includes adjustments to tax payable or recoverable in respect of previous periods. Deferred tax Deferred tax is recognised using the balance sheet method in respect of all temporary differences between the tax bases of assets and liabilities, and their carrying amounts for financial reporting purposes, except as indicated below: Deferred income tax liabilities are recognised for all taxable temporary differences, except: – where the deferred income tax liability arises from the initial recognition of goodwill, or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. – Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised, except: Xstrata plc Annual Report 2006 | 163 6. Principal Accounting Policies (continued) – where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. – The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. To the extent that an asset not previously recognised fulfils the criteria for recognition, a deferred income tax asset is recorded. Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which the asset is realised or the liability is settled, based on tax rates and tax laws enacted or substantively enacted at the balance sheet date. Current and deferred tax relating to items recognised directly in equity are recognised in equity and not in the income statement. Pensions and other post-retirement obligations The Group’s contributions to its defined contribution pension plans are charged to the income statement in the year to which they relate. The Group contributes to separately administered defined benefit pension plans. For defined benefit funds, plan assets are measured at fair value, while plan liabilities are measured on an actuarial basis using the projected unit credit method and discounted at an interest rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the plan liabilities. The expected return on plan assets is based on an assessment made at the beginning of the year of long term market returns on scheme assets, adjusted for the effect on the fair value of plan assets of contributions received and benefits paid during the year. In measuring its defined benefit liability past service costs are recognised as an expense on a straight-line basis over the period until the benefits become vested. To the extent that the benefits vest immediately following the introduction of, or changes to, a defined benefit plan, the past service costs are recognised immediately. When a settlement (eliminating all obligations for part or all of the benefits that have already accrued) or a curtailment (reducing future obligations as a result of material reduction in the scheme membership or a reduction in future entitlement) occurs, the obligation and related plan assets are re-measured using current actuarial assumptions and the resultant gain or loss recognised in the income statement during the period in which the settlement or curtailment occurs. The service cost of providing pension benefits to employees for the year is determined using the projected unit method and is recognised in the income statement. The difference between the expected return on plan assets and the unwinding of the discount on plan liabilities is recognised in the income statement. Actuarial gains or losses are recognised directly in equity through the statement of recognised income and expenses. The full pension surplus or deficit is recorded in the balance sheet, with the exception of the impact of any recognition of past service costs. Surpluses recorded are restricted to the sum of any unrecognised past service costs and present value of any amounts the Group expects to recover by way of refunds from the plan or reductions in future contributions. The Group also provides post-retirement healthcare benefits to certain employees in Canada, the Dominican Republic, South Africa and the United States. These are accounted for in a similar manner to the defined benefit pension plans. These benefits are unfunded. Ordinary share capital Ordinary shares issued by the Company are recorded at the net proceeds received, which is the fair value of the consideration received less costs that are incurred in connection with the share issue. The nominal par value of the shares issued is taken to the share capital account and any excess is recorded in the share premium account, including the costs that were incurred with the share issue. Share-based compensation plans The Group makes share-based awards, including free shares and options, to certain employees. 164 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 6. Principal Accounting Policies (continued) Equity-settled awards For equity-settled awards, the fair value is charged to the income statement and credited to retained earnings, on a straight line basis over the vesting period, after adjusting for the estimated number of awards that are expected to vest (taking into account the achievement of non-market based performance conditions). The fair value of the equity-settled awards is determined at the date of the grant. In calculating fair value, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of the Company (market conditions). The fair value is determined by external experts using option pricing models. At each balance sheet date prior to vesting, the cumulative expense representing the extent to which the vesting period has expired and management’s best estimate of the awards that are ultimately expected to vest is computed (after adjusting for non-market performance conditions). The movement in cumulative expense is recognised in the income statement with a corresponding entry within equity. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified over the original vesting period. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification, over the remainder of the new vesting period. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. Any compensation paid up to the fair value of the awards at the cancellation or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the income statement. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the new awards are treated as if they are a modification of the original award, as described in the previous paragraph. Cash-settled awards For cash-settled awards, the fair value is re-calculated at each balance date until the awards are settled based on the estimated number of awards that are expected to vest adjusting for market and non-market based performance conditions. During the vesting period, a liability is recognised representing the portion of the vesting period which has expired at the balance sheet date times the fair value of the awards at that date. After vesting the full fair value of the unsettled awards at each balance date is recognised as a liability. Movements in the liability are recognised in the income statement. The fair value is recalculated using an option pricing model (refer to note 37). The Group has taken advantage of the transitional provisions on adoption of IFRS in relation to unvested equity-settled awards and has applied the above policies only to awards granted after 7 November 2002 that had not vested prior to 1 January 2005. Equity settled awards that do not meet the criteria above are accounted for in accordance with the Group’s historical UK GAAP accounting policy which was to recognise only the intrinsic value or cost of the potential awards as an expense. The cost of these awards were accrued over the performance period of each plan based on the intrinsic value of the equity settled award. Borrowing costs Borrowing costs are recognised as an expense in the period they incurred, except to the extent they are related to the establishment of a loan facility. In such cases they are capitalised and amortised over the life of the facility. Comparatives Where applicable, prior year figures have been adjusted to disclose them on the same basis as current period figures. The most significant adjustment relates to the classification of deferred stripping. Deferred stripping costs, which were previously classified within other assets on the balance sheet, have been reclassified to property, plant and equipment to more accurately reflect the nature of the asset. Previously, when the costs deferred were charged to the income statement, the amount charged was recorded in cost of sales. Consistent with the adjusted presentation in the balance sheet, amounts charged to the income statement are now included in depreciation – cost of sales. This change in classification has resulted in the reclassification from other assets to property, plant and equipment of US$304 million as at 31 December 2006 (2005 US$141 million). The reclassification from cost of sales to depreciation cost of sales was US$18 million for the year ended 31 December 2006 (2005 US$nil). Xstrata plc Annual Report 2006 | 165 7. Acquisitions Business combinations Cerrejón On 20 April 2006, the Group acquired a 331⁄ 3% interest in the Cerrejón thermal coal operation in Colombia (Cerrejón) for a cash consideration of US$1,719 million from Glencore International AG (also refer to note 36). The provisional fair values of the identifiable assets and liabilities of the 331⁄ 3% interest in Cerrejón as at the date of acquisition were: IFRS carrying value Fair value adjustments Provisional fair value to Group US$m Intangible assets Property, plant and equipment Financial assets Inventories Trade and other receivables Trade and other payables Provisions Deferred tax liabilities Income taxes payable Financial liabilities Net assets Goodwill arising on acquisition 118 347 14 44 36 559 (30) (8) (77) (17) (5) 422 (118) 1,341 56 – 49 1,328 (49) 5 (400) – (55) 829 – 1,688 70 44 85 1,887 (79) (3) (477) (17) (60) 1,251 464 1,715 Consideration: Net cash acquired with the joint venture interest Acquisition costs Cash paid (9) 5 1,719 1,715 These fair values are provisional due to the complexity of the acquisition. The review of the fair value of the assets and liabilities acquired will continue for 12 months from the acquisition date. From the date of acquisition, Cerrejón has contributed US$76 million to the profit of the Group. The goodwill balance is the result of the requirement to recognise a deferred tax liability calculated as the difference between the tax effect of the fair value of the assets and liabilities acquired and their tax bases. 166 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 7. Acquisitions (continued) Tintaya On 21 June 2006, the Group acquired 100% of the Tintaya copper mine in Peru (Tintaya) for a consideration of US$852 million (including working capital adjustments and deferred purchase consideration) from BHP Finance International Limited. The provisional fair values of the identifiable assets and liabilities of Tintaya as at the date of acquisition were: IFRS carrying value Fair value adjustments Provisional fair value to Group US$m Property, plant and equipment Prepayments Inventories Trade and other receivables Trade and other payables Provisions Deferred tax liabilities Income taxes payable Net assets Goodwill arising on acquisition 303 1 90 143 537 (33) (50) (9) (33) 412 488 – – (4) 484 – (44) (130) – 310 791 1 90 139 1,021 (33) (94) (139) (33) 722 125 847 Consideration: Net cash acquired with the subsidiary Cash paid Contingent consideration (5) 816 36 847 The fair values are provisional due to the complexity of the acquisition. The review of the fair value of the assets and liabilities acquired will continue for 12 months from the acquisition date. From the date of acquisition, Tintaya has contributed US$189 million to the profit of the Group. The goodwill balance is the result of the requirement to recognise a deferred tax liability calculated as the difference between the tax effect of the fair value of the assets and liabilities acquired and their tax bases. Xstrata plc Annual Report 2006 | 167 7. Acquisitions (continued) Falconbridge Limited Falconbridge Limited (Falconbridge), a company in which the Group held a 19.9% interest in at 31 December 2005, was a diversified Canadian mining company listed on the Toronto and New York stock exchanges. On 2 August 2006 the Group acquired an additional 4.4% of Falconbridge’s issued and outstanding common shares. On 15 August 2006, a further 67.8% of Falconbridge was purchased for CAD62.50 per share to bring its total beneficial ownership to 92.1%. The remainder of the issued and outstanding common shares were purchased during the period to 1 November 2006 for CAD62.50 per share. The total cash cost of the acquisition, including amounts paid in 2005, was US$18,819 million. Control of Falconbridge was obtained on 15 August 2006 and for the purposes of the acquisition accounting, the share purchases during the year have been treated as occurring simultaneously. The provisional fair values of the identifiable assets and liabilities of Falconbridge as at the date of acquisition were: IFRS carrying value Fair value adjustments Provisional fair value to Group US$m Intangible assets Property, plant and equipment Inventories Trade and other receivables Investments in associates Available-for-sale financial assets Derivative financial assets Other financial assets Prepayments Trade and other payables Interest-bearing loans and borrowings Derivative financial liabilities Provisions Pension deficit Deferred tax liabilities Income tax payable Net assets Minority interests Net attributable assets Goodwill* Net attributable assets including goodwill 113 6,437 2,340 1,380 39 140 56 125 61 10,691 (1,827) (3,765) (125) (848) (235) (393) (326) 3,172 (45) 3,127 – 3,127 154 12,255 (34) (8) 95 – – – – 12,462 23 (35) – (391) – (2,688) (13) 9,358 – 9,358 2,859 12,217 267 18,692 2,306 1,372 134 140 56 125 61 23,153 (1,804) (3,800) (125) (1,239) (235) (3,081) (339) 12,530 (45) 12,485 2,859 15,344 168 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 7. Acquisitions (continued) IFRS carrying value Fair value adjustments Provisional fair value to Group US$m Total consideration: Net cash acquired with the subsidiary Acquisition costs Cash paid for 19.9% acquired in 2005 Cash paid for 80.1% acquired in 2006 (879) 68 1,715 17,036 17,940 Goodwill arising on acquisition on 19.9% interest in Falconbridge in 2005: Cash paid Less fair value of the 19.9% share of the attributable net assets acquired** Goodwill Goodwill arising on acquisition on 80.1% interest in Falconbridge in 2006: 80.1% of net cash acquired with the subsidiary Acquisition costs Cash paid Less 80.1% share of the attributable net assets acquired Goodwill on 80.1% acquisition*** Goodwill from above* Total goodwill 1,715 (1,715) – (704) 68 17,036 16,400 (12,291) 4,109 2,859 6,968 * This goodwill balance is the result of the requirement to recognise a deferred tax liability calculated as the difference between the tax effect of the fair value of the assets and liabilities and their tax bases. ** In accordance with IFRS, this represents 19.9% of the fair value of the net assets at the date of acquisition in 2005. ***Included in this goodwill are certain intangible assets that cannot be individually separated or reliably measured from the acquisition due to their nature. These items include the expected value of synergies and an assembled workforce. These fair values are provisional due to the complexity of the acquisition. The review of the fair value of the assets and liabilities acquired will continue for 12 months from the acquisition date. From the date of acquisition, Falconbridge has contributed a profit of $1,024 million prior to the exceptional goodwill impairment expense of $1,378 million to the profit of the Group. Tavistock TESA Joint Venture On 1 December 2006, the Group agreed to purchase the remaining 50% interest in the Tavistock TESA joint venture in South Africa from its joint venture partner, Total Coal South Africa (Pty) Ltd for US$49 million (refer to note 33). If all of the above combinations had of taken place at the beginning of the year, the Group’s revenue would have been US$26,877 million, EBITDA would have been US$9,860 million, EBIT would have been US$6,381 million and profit would have been US$3,477 million. Xstrata plc Annual Report 2006 | 169 7. Acquisitions (continued) Prior year business combinations African Carbon Group (ACG) On 4 January 2005, the Group acquired 100% of the voting shares of a char producer, an input into the ferrochrome production process, ACG comprising African Fine Carbon (Pty) Limited and African Carbon Producers (Pty) Limited, unlisted companies situated in South Africa, for a cash consideration of US$64 million. The fair values of the identifiable assets and liabilities of ACG as at the date of acquisition were: IFRS carrying value Fair value adjustments Provisional fair value to Group US$m Property, plant and equipment Inventories Trade and other receivables Cash and cash equivalents Interest-bearing loans and borrowings Deferred tax liabilities Income taxes payable Trade and other payables Net assets Goodwill arising on acquisition 22 3 5 3 33 (7) (3) (2) (12) 9 4 – – – 4 – – – – 4 26 3 5 3 37 (7) (3) (2) (12) 13 51 64 Cost: Cash Acquisition costs Cash paid Cash outflow on acquisition: Net cash acquired with the subsidiary Cash paid Net cash outflow Included in goodwill recognised above are supplier contracts and technology which have not been recognised separately as they cannot be accurately valued due to their nature. The recognition of goodwill also is appropriate because of the synergies obtained as char is used in the ferrochrome production process. Interests in joint ventures ARM Effective 1 July 2006, the Group concluded an agreement with African Rainbow Minerals Limited (ARM), to establish a new black majority owned company, ARM Coal, to be 51% owned by ARM and 49% by Xstrata. ARM is listed on the Johannesburg Stock Exchange and is controlled by historically disadvantaged South Africans (HDSAs). ARM Coal holds a 20% participation share in the Group’s existing South African coal business, and a majority 51% interest in the Goedgevonden project, through a joint venture with the Group. 63 1 64 (3) 64 61 170 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 7. Acquisitions (continued) ARM contributed ZAR400 million (US$56 million) in cash for its 51% shareholding in ARM Coal. The Group facilitated ARM Coal’s entry by funding the acquisition of 51% of the Goedgevonden project for ZAR 765 million (US$107 million) and will provide all the funding required to commission this project. The Group’s funding, including debt allocated to the existing South African coal business, was on preferential terms through the use of interest and capital repayment holidays. ARM Coal receives a proportion of the cash flows from operations with the balance used to repay debt. In August 2006, ARM exercised an option to acquire a further 10% direct interest in the Group’s coal operations in South Africa, excluding the Goedgevonden project, for ZAR400 million (US$56 million). This provided HDSA with an effective interest in Xstrata’s South African coal business of 36%. Mototolo project During 2006, the Mototolo joint venture, the terms of which were agreed with Anglo Platinum in 2005 was completed. During the first half of 2006, the Group and Kagiso Trust Investments (‘Kagiso’) formed a black economic empowerment partnership in respect of Xstrata’s 50% interest in the Mototolo joint venture. Kagiso acquired 26% of the Group’s 50% interest, resulting in Kagiso owning a fully participative 13% interest in the earnings of the Mototolo joint venture. The Group retained a 37% interest in the Mototolo joint venture. To acquire this interest, Kagiso agreed to fund the joint venture expenditure costs (both incurred and in the future) in proportion to its interest. Pooling and Sharing Venture In 2004, the Group and Merafe Resources Limited formed a ferrochrome Pooling and Sharing Venture. On 1 July 2006, the Group’s participation in the pooled EBITDA changed from 83.0% to 79.5%. Refer below for further details. Prior year interests in joint ventures Mototolo project On 3 August 2005, Anglo Platinum and the Group formed the Mototolo Joint Venture to develop a platinum group metals (PGM) mine and concentrator on the Eastern Limb of the Bushveld Complex in Mpumalanga, South Africa. This transaction was finalised in 2006. Anglo Platinum and the Group contributed a similar amount of in-situ PGM reserves and resources. Anglo Platinum now purchases the Group’s 50% share of PGM concentrate for further smelting, refining and marketing. The Group has constructed a benefication plant at its own cost to process the UG2 chrome tailings arising from the PGM concentrator and purchases Anglo Platinum’s share of chrome concentrate. McArthur River Joint Venture On 22 September 2005, the Group agreed to purchase the remaining 25% interest in the McArthur River joint venture in the Northern Territory, Australia, from its Joint Venture partner, ANT Minerals Pty Ltd. ANT Minerals is a consortium comprising Nippon Mining & Metals, Mitsui & Co and Marubeni Corporation. Pooling and Sharing Venture In 2005, the Group and Merafe Resources Limited (Merafe) formerly SA Chrome & Alloys Limited, the Group’s partner in the ferrochrome Pooling and Sharing Venture (PSV), acquired chrome ore reserves and resources from Samancor associated with the Kroondal and Marikana mining areas for a total consideration of US$16 million and US$29 million respectively. The Group’s share of the total consideration was US$30 million for the purchase of 50% of Kroondal and 74% of Marikana mining areas. In addition, Merafe acquired Samancor’s 50% stake in the Wonderkop joint venture for a total consideration of ZAR235 million (US$38 million). As a result of these transactions, Merafe’s participation in the earnings before interest, tax, depreciation and amortisation (EBITDA) of the enlarged Venture increased to 17% from 16 November 2005 and increased to 20.5% from 1 July 2006 as outlined below. The Board of Merafe also agreed to participate in the first stage of Project Lion at 20.5%, the Group’s new 360,000 tonnes per annum ferrochrome smelter. The Group’s 50% share in the Wonderkop JV was originally excluded from the PSV and has been placed into the PSV, together with Merafe’s 50% stake acquired from Samancor, effective 16 November 2005. The Group assisted Merafe in making these acquisitions by providing a loan to fund Merafe’s share of the Marikana resources, which was repaid on 15 November 2005, and by standing as guarantor for a new loan facility provided to Merafe by the ABSA bank of South Africa (refer to note 36), which, together with equity financing, has funded Merafe’s acquisition of Samancor’s stake in the Wonderkop JV and the Kroondal resources. Xstrata plc Annual Report 2006 | 171 7. Acquisitions (continued) The Group had previously established the PSV with Merafe, effective from 1 July 2004. Under the PSV, the Group and Merafe contribute assets in the ratio as stated in Year 3 onwards below in exchange for the revised participations in the pooled EBITDA as follows: Original PSV Xstrata Merafe Amended PSV Xstrata Merafe Year 1 Year 2 Year 3 onwards 89.0% 86.0% 82.5% 11.0% 14.0% 17.5% 89.0% 83.0% 79.5% 11.0% 17.0% 20.5% Prior year investments in associates Falconbridge Limited On 14 August 2005, the Group acquired 73,115,756 common shares representing 19.9% of the common shares of Falconbridge from Brookfield Asset Management (Brookfield) for a consideration of CAD2.0 billion (US$1.7 billion), or CAD28 per share, settled by issuing short term promissory note A for US$1,327 million and promissory note B for US$375 million with coupons of 4% per annum. On 22 August 2005, promissory note A was refinanced by drawing on the US$600 million term loan and the Group’s existing syndicated loan facility (refer note 28). On 6 September 2005, promissory note B was replaced by a US$375 million convertible debenture (refer note 29). Following the acquisition of 19.9% from Brookfield, a further 550,240 shares in Falconbridge were acquired for a cash consideration of CAD15 million (US$13 million) to 5 September 2005, taking the Group’s holding to 20%. This interest was diluted to 19.9% at 31 December 2005 after Falconbridge issued additional share capital. The Group treated this investment as an associate until 11 October 2005. Following the announcement of Inco Limited’s proposed friendly takeover offer to acquire Falconbridge for CAD34.00 per share on 11 October 2005, equity accounting was ceased as the Group no longer had significant influence over the investment and the investment was classified as an available-for-sale asset (refer to note 22). From the date of acquisition until 11 October 2005, the 20% interest in the Falconbridge contributed US$21 million to the net profit of the Group (refer to note 20). 172 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 8. Discontinued operations and disposals Disposals Cook Coal Operation On 19 October 2006, the Group disposed of its Cook coal operation to Caledon Resources Limited. A gain of $16 million was recognised on the disposal (refer to note 10). Prior year disposals Discontinued operations Forestry The wholly owned forestry operation in Chile, Forestal Los Lagos SA (FLL) was sold on 6 January 2005. The majority (89%) of the operation was purchased by Forestal Valdivia SA, a subsidiary of Forestal Arauco, an integrated private Chilean forestry company. The remaining 11% was purchased by Forestal del Sur SA, a privately-held forestry trading company. The disposal proceeds amount to US$24 million. As a result of the sale, the Group was released from all of its obligations with respect to the US$12 million project debt related to FLL. A gain of US$4 million was realised upon disposal of the investment in the forestry operation, mainly due to a US$5 million recycled cumulative foreign exchange net gain from foreign currency translation reserve within equity. There were no other income or expenses during 2005. As the disposal occurred on 6 January 2005, the only cash flow in respect of this operation in the year ended 31 December 2005 was the disposal proceeds outlined above. Earnings/(loss) per share from discontinued operations: (US$) 2006 2005 Basic earnings per share Diluted earnings per share 9. Segmental Analysis – – 0.01 0.01 The Group’s primary reporting format is business segments and its secondary format is geographical segments. The operating businesses are organised and managed separately according to the nature of the products produced, with each segment representing a strategic business unit that offers different products and serves different markets. Transfer prices between business segments are set on an arm’s length basis in a manner similar to transactions with third parties. The Group’s geographical segments are determined by the location of the Group’s assets and operations. Business segments The following tables present revenue and profit information and certain asset and liability information regarding the Group’s business segments for the years ended 31 December 2006 and 2005. Xstrata plc Annual Report 2006 | 173 9. Segmental Analysis (continued) For the year ended 31 December Before exceptional items Exceptional items Before exceptional items Exceptional items US$m 2006 2005 Revenue External parties: Coal – Thermal Coal – Coking Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Revenue (continuing operations) Inter-segmental: Coal Copper Nickel Zinc Lead Eliminations 3,019 598 3,617 748 12 199 7,007 1,678 3,721 530 120 17,632 3 23 41 59 (126) 17,632 – – – – – – – – – – – – – – – – – – 3,019 598 3,617 748 12 199 7,007 1,678 3,721 530 120 17,632 3 23 41 59 (126) 17,632 2,864 536 3,400 798 – 318 2,008 – 1,449 – 77 8,050 – – – – – 8,050 – – – – – – – – – – – – – – – – – – 2,864 536 3,400 798 – 318 2,008 – 1,449 – 77 8,050 – – – – – 8,050 174 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 9. Segmental Analysis (continued) Before exceptional Items Exceptional items Before exceptional items Exceptional items US$m 2006 2005 Profit before interest, taxation, depreciation and amortisation (EBITDA) Coal – Thermal Coal – Coking Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated Segment EBITDA (continuing operations) Share of results from associates (net of tax, continuing operations): Coal Copper Zinc Lead Unallocated EBITDA (continuing operations) Profit on sale of discontinued operations: Forestry Total 947 300 1,247 141 11 111 3,349 788 1,477 123 26 (170) 7,103 16 – 16 – – – – – – – – 13 29 963 300 1,263 141 11 111 3,349 788 1,477 123 26 (157) 7,132 1,066 278 1,344 169 – 181 1,131 – 303 – 14 (62) 3,080 – – – – – – – – – – – (10) (10) 1,066 278 1,344 169 – 181 1,131 – 303 – 14 (72) 3,070 2 – 2 – 7,107 – 7,107 – – – – 29 – 29 2 – 2 – 7,136 – 7,136 2 16 – 5 3,103 – 3,103 – – – – (10) 4 (6) 2 16 – 5 3,093 4 3,097 Xstrata plc Annual Report 2006 | 175 9. Segmental Analysis (continued) Before exceptional Items Exceptional items Before exceptional items Exceptional items US$m 2006 2005 Depreciation and amortisation Depreciation: Coal Chrome Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated Depreciation (continuing operations) Amortisation: Coal Copper Nickel Zinc Lead Technology Unallocated Total (continuing operations) Total: Coal Chrome Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated Depreciation and amortisation (from continuing operations) Impairment of assets Chrome Copper Zinc Lead Total impairment of assets (continuing operations) 356 23 6 495 162 149 25 1 4 1,221 – – – – – – – – – – 356 23 6 495 162 149 25 1 4 1,221 266 24 6 209 – 63 – 1 2 571 – – – – – – – – – – 266 24 6 209 – 63 – 1 2 571 1 4 12 1 3 2 23 – – – – – – – 1 4 12 1 3 2 23 1 – 1 3 2 7 – – – – – – 1 – 1 3 2 7 357 23 6 499 174 150 25 4 6 1,244 – – – – – – – – – – 357 23 6 499 174 150 25 4 6 1,244 267 24 6 209 – 64 – 4 4 578 – – – – – – – – – – 267 24 6 209 – 64 – 4 4 578 – – – – – 598 780 1,378 – 598 780 1,378 3 2 – 5 – – – – 3 2 – 5 176 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 9. Segmental Analysis (continued) Before exceptional Items Exceptional items Before exceptional items Exceptional items US$m 2006 2005 Profit before interest and taxation (EBIT) Segment result: Coal – Thermal Coal – Coking Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated Segment EBIT (continuing operations) Share of results from associates (net of tax, continuing operations): Coal Copper Zinc Lead Unallocated EBIT (continuing operations) Finance income Finance expense Profit before taxation Income tax expense Profit from continuing operations Profit on sale of discontinued operations: Forestry Total 640 250 890 118 11 105 2,850 614 1,327 98 22 (176) 5,859 16 – 16 – – – (598) – (780) – – 13 (1,349) 656 250 906 118 11 105 2,252 614 547 98 22 (163) 4,510 833 244 1,077 142 – 175 920 – 239 – 10 (66) 2,497 – – – – – – – – – – – (10) (10) 833 244 1,077 142 – 175 920 – 239 – 10 (76) 2,487 2 – 2 – 5,863 112 (646) 5,329 (1,574) 3,755 – 3,755 – – – – (1,349) 170 (235) (1,414) 11 (1,403) – (1,403) 2 – 2 – 4,514 282 (881) 3,915 (1,563) 2,352 – 2,352 2 16 – 5 2,520 36 (128) 2,428 (551) 1,877 – 1,877 – – – – (10) 88 (44) 34 8 42 4 46 2 16 – 5 2,510 124 (172) 2,462 (543) 1,919 4 1,923 Xstrata plc Annual Report 2006 | 177 9. Segmental Analysis (continued) at 31 December 2006 at 31 December 2005 US$m Total assets Before tax assets and investments in associates: Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated* Total segmental assets (continuing operations) Deferred tax assets: Chrome Copper Zinc Lead Aluminium Unallocated Total (continuing operations) Investment in associates: Coal Zinc Lead Total (continuing operations) Total assets Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated* Total assets (from continuing operations) 8,860 1,146 108 170 19,339 8,359 6,365 1,916 104 648 47,015 6,218 1,106 – 214 2,953 – 1,831 – 73 2,373 14,768 2 6 8 4 2 22 2 – 3 – 2 7 48 131 179 44 – 44 8,908 1,148 108 170 19,345 8,359 6,504 1,920 104 650 47,216 6,262 1,108 – 214 2,953 – 1,834 – 73 2,375 14,819 *2005 amounts include available-for-sale financial assets not directly attributable to business segments. 2006 amounts include corporate assets not directly attributable to business segments. 178 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 9. Segmental Analysis (continued) at 31 December 2006 at 31 December 2005 US$m Total liabilities Before tax liabilities, interest bearing loans and borrowings: Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated Total segmental liabilities (continuing operations) Tax liabilities, interest bearing loans and borrowings*: Coal Chrome Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated Total tax liabilities, interest bearing loans and borrowings (continuing operations) Total liabilities Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated Total liabilities (from continuing operations) 740 106 37 24 2,026 706 1,113 225 55 773 5,805 533 94 – 79 344 – 525 – 22 269 1,866 1,826 144 – 3,334 1,109 664 382 3 14,227 21,689 1,271 288 6 624 – 126 – 6 2,495 4,816 2,566 250 37 24 5,360 1,815 1,777 607 58 15,000 27,494 1,804 382 – 86 967 – 651 – 28 2,764 6,682 *These liabilities are included in Interest-bearing loans and borrowings, convertible borrowings, deferred tax liabilities and Income taxes payable line items in the balance sheet. Xstrata plc Annual Report 2006 | 179 9. Segmental Analysis (continued) at 31 December 2006 at 31 December 2005 US$m Net assets Before tax assets and liabilities, investment in associates, interest bearing loans and borrowings: Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated* Total segmental net assets (continuing operations) Deferred tax assets, tax liabilities, interest bearing loans and borrowings: Coal Chrome Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated Total (continuing operations) Investment in associates: Coal Zinc Lead Total (continuing operations) Net assets Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated* Net assets (from continuing operations) 8,120 1,040 71 146 17,313 7,653 5,252 1,691 49 (125) 41,210 5,685 1,012 – 135 2,609 – 1,306 – 51 2,104 12,902 (1,826) (142) – (3,328) (1,109) (656) (378) (3) (14,225) (21,667) (1,271) (286) (6) (624) – (123) – (6) (2,493) (4,809) 48 131 179 44 – 44 6,342 898 71 146 13,985 6,544 4,727 1,313 46 (14,350) 19,722 4,459 726 – 128 1,985 – 1,183 – 45 (389) 8,137 *2005 amounts include available-for-sale financial assets not directly attributable to business segments. 2006 amounts include corporate assets and liabilities not directly attributable to business segments. 180 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 9. Segmental Analysis (continued) US$m 2006 2005 Capital expenditure Sustaining: Coal Chrome Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated Total sustaining (continuing operations) Expansionary: Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Total expansionary (continuing operations) Total: Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated Total (from continuing operations) 226 36 4 191 68 114 18 1 4 662 188 26 9 115 – 89 – 1 2 430 289 161 58 1 159 87 158 4 1 918 281 161 – 7 36 – 32 – – 517 515 197 58 5 350 155 272 22 2 4 1,580 469 187 – 16 151 – 121 – 1 2 947 Xstrata plc Annual Report 2006 | 181 9. Segmental Analysis (continued) The average number of employees, which includes Executive Directors and excludes contractors, during the year was as follows: 2006 2005 Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated Total (continuing operations) The average number of contractors during the year was as follows: Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Total 7,797 6,374 464 530 5,619 1,586 4,562 1,125 65 77 28,198 6,762 4,408 – 363 3,256 – 2,742 – 56 41 17,628 5,378 3,912 227 1,177 3,135 310 1,511 160 61 15,882 4,061 500 – 75 1,018 – 768 – 41 6,463 182 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 9. Segmental Analysis (continued) Geographical segments The following tables present revenue and profit information and certain asset and liability information regarding the Group’s geographical segments for the years ended 31 December 2006 and 2005. For the year ended 31 December US$m Before exceptional items Exceptional items 2006 Before exceptional items Exceptional items 2005 Revenue by origin External parties: Africa Americas North Americas South Australasia Europe Revenue (continuing operations) Inter-segmental: Americas North Americas South Australasia Europe Eliminations 1,673 4,408 4,142 4,815 2,594 17,632 188 374 611 15 (1,188) 17,632 – – – – – – – – – – – – 1,673 4,408 4,142 4,815 2,594 17,632 188 374 611 15 (1,188) 17,632 1,906 – 849 4,086 1,209 8,050 – – 362 – (362) 8,050 – – – – – – – – – – – – 1,906 – 849 4,086 1,209 8,050 – – 362 – (362) 8,050 Revenue by destination External parties: Africa Americas North Americas South Asia Australasia Europe Middle east Revenue (continuing operations) Inter-segmental: Americas North Americas South Australasia Europe Eliminations 228 3,895 689 5,279 922 6,532 87 17,632 493 69 18 608 (1,188) 17,632 – – – – – – – – – – – – – – 228 3,895 689 5,279 922 6,532 87 17,632 493 69 18 608 (1,188) 17,632 237 – 711 3,391 655 2,964 92 8,050 – – – 362 (362) 8,050 – – – – – – – – – – – – – – 237 – 711 3,391 655 2,964 92 8,050 – – – 362 (362) 8,050 Xstrata plc Annual Report 2006 | 183 9. Segmental Analysis (continued) Before exceptional items Exceptional items Before exceptional items Exceptional items US$m 2006 2005 EBITDA Africa Americas North Americas South Australasia Europe Unallocated Segment EBITDA (continuing operations) Share of results from associates (net of tax, continuing operations): Australasia Americas North Americas South Unallocated EBITDA (continuing operations) Profit on sale of discontinued operations: Americas South Total 439 1,271 2,493 2,520 550 (170) 7,103 – – – 16 – 13 29 439 1,271 2,493 2,536 550 (157) 7,132 620 – 544 1,800 178 (62) 3,080 – – – – – (10) (10) 620 – 544 1,800 178 (72) 3,070 2 2 – – 7,107 – 7,107 – – – – 29 – 29 2 2 – – 7,136 – 7,136 2 – 16 5 3,103 – 3,103 – – – – (10) 4 (6) 2 – 16 5 3,093 4 3,097 184 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 9. Segmental Analysis (continued) Before exceptional items Exceptional items Before exceptional items Exceptional items US$m 2006 2005 Depreciation and amortisation Depreciation: Africa Americas North Americas South Australasia Europe Unallocated Depreciation (continuing operations) Amortisation: Americas North Americas South Australasia Europe Unallocated Amortisation (continuing operations) Total: Africa Americas North Americas South Australasia Europe Unallocated Depreciation and amortisation (from continuing operations) Impairment of assets Africa Americas South Unallocated* Total impairment of assets (continuing operations) *Represented by: Copper Americas Zinc Lead 106 297 392 386 36 4 1,221 – – – – – – – 106 297 392 386 36 4 1,221 107 – 103 324 35 2 571 – – – – – – – 107 – 103 324 35 2 571 13 3 4 1 2 23 – – – – – – 13 3 4 1 2 23 – – 4 1 2 7 – – – – – – – – 4 1 2 7 106 310 395 390 37 6 1,244 – – – – – – – 106 310 395 390 37 6 1,244 107 – 103 328 36 4 578 – – – – – – – 107 – 103 328 36 4 578 – – – – – – – – – 1,378 1,378 598 780 1,378 – – 1,378 1,378 598 780 1,378 3 2 – 5 – – – – – – – – – – 3 2 – 5 – – – Xstrata plc Annual Report 2006 | 185 9. Segmental Analysis (continued) Before exceptional items Exceptional items Before exceptional Items Exceptional items US$m 2006 2005 EBIT Segment result: Africa Americas North Americas South Australasia Europe Unallocated Segment EBIT (continuing operations) Share of results from associates (net of tax, continuing operations): Australasia Americas North Americas South Unallocated EBIT (continuing operations) Finance income Finance expense Profit before taxation Income tax expense Profit from continuing operations Profit on sale of discontinued operations: Americas South Total 333 961 2,098 2,130 513 (176) 5,859 – – – – – (1,349) (1,349) 333 961 2,098 2,130 513 (1,525) 4,510 510 – 439 1,472 142 (66) 2,497 – – – – – (10) (10) 510 – 439 1,472 142 (76) 2,487 2 2 – – 5,863 112 (646) 5,329 (1,574) 3,755 – 3,755 – – – – (1,349) 170 (235) (1,414) 11 (1,403) – (1,403) 2 2 – – 4,514 282 (881) 3,915 (1,563) 2,352 – 2,352 2 – 16 5 2,520 36 (128) 2,428 (551) 1,877 – 1,877 – – – – (10) 88 (44) 34 8 42 4 46 2 – 16 5 2,510 124 (172) 2,462 (543) 1,919 4 1,923 186 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 9. Segmental Analysis (continued) at 31 December 2006 at 31 December 2005 US$m Total assets Before tax assets and investment in associates: Africa Americas North Americas South Australasia Europe Unallocated* Total segmental assets (continuing operations) Deferred tax assets: Africa Americas North Europe Unallocated Total (continuing operations) Investment in associates: Africa Americas North Australasia Total (continuing operations) Total assets Africa Americas North Americas South Australasia Europe Unallocated* Total (continuing operations) 3,761 12,651 17,632 7,668 1,924 3,379 47,015 3,415 – 1,460 6,194 1,326 2,373 14,768 2 10 8 2 22 2 – 3 2 7 2 131 46 179 1 – 43 44 3,765 12,792 17,632 7,714 1,932 3,381 47,216 3,418 – 1,460 6,237 1,329 2,375 14,819 *2005 includes available-for-sale financial assets not directly attributable to geographical segments. 2006 amounts include corporate assets and goodwill not directly attributable to geographical segments. Xstrata plc Annual Report 2006 | 187 9. Segmental Analysis (continued) at 31 December 2006 at 31 December 2005 US$m Total liabilities Before tax liabilities, interest bearing loans and borrowings: Africa Americas North Americas South Australasia Europe Unallocated Total segmental liabilities (continuing operations) Tax liabilities, interest bearing loans and borrowings: Africa Americas North Americas South Australasia Europe Unallocated Total (continuing operations) Total liabilities Africa Americas North Americas South Australasia Europe Unallocated Total (continuing operations) 385 2,329 883 971 464 773 5,805 321 – 83 864 329 269 1,866 756 1,486 3,665 1,431 124 14,227 21,689 777 – 369 1,133 42 2,495 4,816 1,141 3,815 4,548 2,402 588 15,000 27,494 1,098 – 452 1,997 371 2,764 6,682 188 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 9. Segmental Analysis (continued) at 31 December 2006 at 31 December 2005 US$m Net assets Before tax assets and liabilities, investment in associates, interest bearing loans and borrowings: Africa Americas North Americas South Australasia Europe Unallocated* Total segmental net assets (continuing operations) Tax assets and liabilities, interest bearing loans and borrowings: Africa Americas North Americas South Australasia Europe Unallocated Total (continuing operations) Investment in associates: Africa Americas North Australasia Total (continuing operations) Net assets Africa Americas North Americas South Australasia Europe Unallocated* Total (continuing operations) 3,376 10,322 16,749 6,697 1,460 2,606 41,210 3,094 – 1,377 5,330 997 2,104 12,902 (754) (1,476) (3,665) (1,431) (116) (14,225) (21,667) (775) – (369) (1,133) (39) (2,493) (4,809) 2 131 46 179 1 – 43 44 2,624 8,977 13,084 5,312 1,344 (11,619) 19,722 2,320 – 1,008 4,240 958 (389) 8,137 *2005 includes available-for-sale financial assets not directly attributable to geographical segments. 2006 amounts include corporate assets and goodwill not directly attributable to geographical segments Xstrata plc Annual Report 2006 | 189 9. Segmental Analysis (continued) US$m 2006 2005 Capital expenditure Sustaining: Africa Americas North Americas South Australasia Europe Unallocated Total sustaining (continuing operations) Expansionary: Africa Americas North Americas South Australasia Europe Total expansionary (continuing operations) Total: Africa Americas North Americas South Australasia Europe Unallocated Total (continuing operations) 99 100 105 324 30 4 662 326 83 80 406 23 918 425 183 185 730 53 4 1,580 94 – 21 284 28 3 430 175 – 14 315 13 517 269 – 35 599 42 2 947 The average number of employees, which includes Executive Directors and excludes contractors, during the year was as follows: 2006 2005 Africa Americas North Americas South Australasia Europe Unallocated Total (continuing operations) The average number of contractors during the year was as follows: 11,494 3,728 4,311 6,832 1,692 141 28,198 8,936 – 1,192 5,803 1,656 41 17,628 2006 2005 Africa Americas North Americas South Australasia Europe Total 7,621 390 3,795 3,682 394 15,882 2,676 – 328 3,163 296 6,463 190 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 10. Revenues and Expenses Revenue and expenses US$m 2006 2005 Revenue – sales of goods Less cost of sales – after depreciation and amortisation and impairment of assets Gross profit Administrative expenses – after depreciation and amortisation and impairment of assets Inventory recognised as an expense Operating lease rental expense – minimum lease payments Royalties paid Research and development Depreciation and amortisation US$m 17,632 (10,098) 7,534 1,912 10,098 34 391 4 8,050 (4,434) 3,616 209 4,368 21 231 1 2006 2005 Depreciation of owned assets Depreciation of assets held under finance leases and hire purchase contracts Total depreciation Amortisation of intangible assets Total depreciation and amortisation from continuing operations Employee costs including Directors’ emoluments (refer to the Remuneration report on pages 136 to 139 for details) US$m 1,207 14 1,221 23 1,244 561 10 571 7 578 2006 2005 Wages and salaries Pension and other post-retirement benefit costs (refer to note 35) Social security and other benefits Share-based compensation plans (refer to note 35) Employee costs from continuing operations Impairment of property, plant and equipment US$m 1,181 112 51 91 1,435 718 81 47 31 877 2006 2005 Chrome – Africa Copper – Americas – – – 3 2 5 The impairment of assets in 2005 relates to the write down of uneconomic exploration costs and mineral resources (included in capital works in progress and mining properties and leases) following further geological studies in South America and South Africa indicated that such assets were not recoverable. Xstrata plc Annual Report 2006 | 191 10. Revenues and Expenses (continued) Auditor’s remuneration US$m 2006 2005 Auditor’s remuneration (a): – Group auditors – UK – Group auditors – overseas Amounts paid to auditors for other work: Group auditors (b) – Corporate finance transactions (c) – Taxation (d) – Other (e) Other audit firms – Internal audit – Other (f) 1 9 10 1 4 5 12 2 1 15 1 4 5 5 2 1 8 1 3 4 (a) The Group audit fee includes US$40,000 (2005 US$50,000) in respect of the parent company. (b) Included in other fees to auditors is US$1 million (2005 US$1 million) relating to the Company and its UK subsidiaries. (c) 2006 includes amounts incurred on the acquisitions of Cerrejón, Tintaya and Falconbridge. Of this amount US$10 million has been capitalised as acquisition costs (refer to note 7). 2005 includes amounts spent on the proposed acquisition of WMC, and other potential transactions. (d) Includes corporate tax compliance and advisory services. (e) Primarily relates to accounting advice and non-statutory assurance services. (f) Includes tax advisory services, accounting assistance and acquisition due diligence. The Corporate Governance Report set out on pages 115 to 125 details the Group’s policy with regard to the independence and objectivity of the external and internal auditors and the provision and approval of non-audit services provided by the external auditors. Finance income US$m 2006 2005 Bank interest Dividends Interest – other Finance income before exceptional items Foreign currency gains on bank loans Recycled gains from the foreign currency translation reserve Exceptional finance income Total finance income 93 3 16 112 120 50 170 282 20 9 7 36 – 88 88 124 192 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 10. Revenues and Expenses (continued) Finance costs US$m 2006 2005 Amortisation of loan issue costs Convertible borrowings amortised cost charge Discount unwinding Finance charges payable under finance leases and hire purchase contracts Interest on bank loans and overdrafts Interest on convertible borrowings and capital market notes Interest on minority interest loans Interest on preference shares Unrealised loss on interest rate swap Interest – other Finance cost before exceptional items Foreign currency losses on bank loans* Recycled losses from the foreign currency translation reserve Loan issue costs written-off on facility refinancing Exceptional finance cost Total finance cost *These costs relate to foreign currency gains and losses on borrowings denominated in foreign currencies, predominantly CAD. 9 8 40 17 398 142 6 12 – 14 646 129 97 9 235 881 2 10 14 7 43 38 6 – 2 6 128 – 27 17 44 172 Total interest income and expense (calculated using the effective interest method) for financial assets and liabilities not at fair value through the profit and loss are US$112 million (2005 US$36 million) and US$598 million (2005 US$122 million) respectively. Exceptional Items Restructuring and closure costs Restructuring and redundancy costs of US$50 million (2005 US$nil) relate to the former Falconbridge Group following its acquisition. Acquisition costs The Group made a cash offer to purchase the entire share capital of WMC Resources Limited, an Australian listed diversified mining company in October 2004. In March 2005 BHP Billiton Limited announced a higher cash offer and the Group announced it would not increase its offer price. The Group incurred acquisition costs of US$10 million and US$17 million of financing costs in relation to the offer for WMC Resources Limited. The tax credit attributable to the costs incurred is US$8 million. Xstrata plc Annual Report 2006 | 193 10. Revenues and Expenses (continued) Impairment of Goodwill The acquisition of Falconbridge was completed in two stages. The Group acquired 19.9% of Falconbridge at CAD28 per share in 2005, before acquiring the remaining 80.1% in 2006 at a price of CAD62.50 per share. The average price paid per share for the 100% interest was CAD56.44. The Group’s ability to average the purchase price paid for the second tranche of shares over the full purchase provided the Group with a compelling competitive advantage and was a significant factor in the success of the transaction. Under IFRS, this advantage cannot be recognised, as goodwill is calculated separately for each transaction, regardless of the average price paid per share to acquire the 100% interest. This accounting treatment has resulted in the creation of additional goodwill of US$1.5 billion. The Group has completed a detailed fair value assessment of the assets acquired and, in accordance with IFRS, tested goodwill for impairment. As a consequence, the Company has determined that an impairment charge of US$1,378 million is appropriate (refer to note 15). Profit on sale of available-for-sale financial assets US$m 2006 2005 Unallocated 63 63 – – Listed shares were sold for a consideration of US$190 million in 2006. Profit on sale of operations US$m 2006 2005 Coal – Australia 16 16 – – On 19 October 2006, the Group disposed of its Cook coal operation in Australia to Caledon Resources Limited. A gain of US$16 million was recognised on the disposal (refer to note 8). 194 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 11. Income Taxes Income tax charge Significant components of income tax expense for the years ended: US$m 2006 2005 Consolidated income statement Current tax: Based on taxable income of the current year Prior year over provision Total current taxation charge for the year Deferred taxation: Origination and reversal of temporary differences Change in tax rates Benefit from previously unrecognised tax losses, tax credits or temporary differences of a prior year that are used to reduce deferred tax expense Benefit from entry into the Australian tax consolidation regime Prior year under provision Total deferred taxation charge/(credit) for the year Total taxation charge Total taxation charge reported in consolidated income statement Income tax attributable to discontinued operations Total taxation charge UK taxation included above: Current tax Deferred tax Total taxation charge/(credit) Recognised directly in equity Deferred tax: Available-for-sale financial assets Cash flow hedges Other equity classified items Total taxation charge/(credit) reported in equity 1,387 (1) 1,386 144 (6) (4) – 43 177 1,563 1,563 – 1,563 499 (13) 486 81 (21) (1) (2) – 57 543 543 – 543 2 (4) (2) 1 – 1 75 (16) (44) 15 (83) 59 18 (6) Xstrata plc Annual Report 2006 | 195 11. Income Taxes (continued) A reconciliation of income tax expense applicable to accounting profit before income tax at the weighted average statutory income tax rate to income tax expense at the Group average effective income tax rate for the years ended is as follows: US$m 2006 2005 Profit before taxation from continuing operations Profit before taxation from discontinued operations Profit before taxation At average statutory income tax rate 24.3% (2005 24.2%) Goodwill impairment Additional mining taxes Foreign currency gains and losses Non-deductible expenses Rebatable dividends received Research and development allowances Change in tax rates Benefit from entry into the Australian tax consolidation regime Prior year under/(over) provision Other At average effective income tax rate Total taxation charge reported in consolidated income statement Income tax attributable to discontinued operations At average effective income tax rate The above reconciling items are disclosed at the tax rates that apply in the country where they have arisen. 3,915 – 3,915 950 455 50 67 30 (8) (17) (6) – 43 (1) 1,563 1,563 – 1,563 2,462 4 2,466 598 – – 5 7 (1) (31) (21) (2) (13) 1 543 543 – 543 The average statutory income tax rate is the average of the standard income tax rates applicable in the countries in which the Group operates, weighted by the profit/(loss) before tax of the subsidiaries in the respective countries as included in the consolidated accounts. The change in the average statutory income tax rate is due to the variation in the weight of subsidiaries’ profits by various changes in the enacted standard income tax rates and due to the acquisition of subsidiaries in countries with different tax rates. Deferred income taxes Deferred tax assets are recognised for the carry-forward of unused tax losses and unused tax credits to the extent that it is probable that taxable profits will be available against which the unused tax losses/credits can be utilised. Unrecognised tax losses The Group has tax losses that are available indefinitely of US$8 million (2005 US$9 million) to carry forward against future taxable income of the companies in which the losses arose. Deferred tax assets have not been recognised in respect of these losses as they may not be used to offset taxable profits elsewhere in the Group and they have arisen in subsidiaries that have been loss-making for some time. There are no other deductible temporary differences that have not been not recognised at balance sheet date. Temporary differences associated with Group investments At 31 December 2006, there was no recognised deferred tax liability (2005 US$nil) for taxes that would be payable on the un-remitted earnings of certain of the Group’s subsidiaries, associates or joint ventures as: – – – The Group has determined that undistributed profits of its subsidiaries will not be distributed in the foreseeable future; The profits of the associates will not be distributed until it obtains the consent of the Group; and The investments are not held for resale and are expected to be recouped by continued use of these operations by the subsidiaries. The temporary differences associated with investments in subsidiaries, associates and joint ventures, for which deferred tax assets have not been recognised amount to US$2,608 million (2005 US$315 million). 196 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 11. Income Taxes (continued) There are no income tax consequences for the Group attaching to the payment of dividends by the Company to its shareholders. The deferred tax assets/(liabilities) included in the balance sheet is as follows: US$m 2006 2005 Tax losses Derivative financial instruments Employee provisions Other provisions Rehabilitation and closure Research and development pools Accelerated depreciation Coal export rights Other intangibles Government grants Deferred stripping Available-for-sale financial assets Other equity related items Other Represented on the face of the balance sheet as: Deferred tax assets Deferred tax liabilities 78 35 65 65 120 209 (5,289) (253) (31) (13) (49) (7) (3) (29) (5,102) 22 (5,124) (5,102) 73 77 49 15 67 – (1,200) (300) (10) (15) (36) (83) 18 13 (1,332) 7 (1,339) (1,332) The deferred tax included in the Group income statement is as follows: US$m 2006 2005 Tax losses Accelerated depreciation Deferred stripping Rehabilitation and closure Employee provisions Other provisions Other From continuing operations From discontinued operations 118 95 17 (29) (5) (2) (17) 177 – 177 106 (11) 26 (6) 4 (6) (56) 57 – 57 Tax audits The company periodically assesses its liabilities and contingencies for all tax years open to audit based upon the latest information available. For those matters where it is probable that an adjustment will be made, the company recorded its best estimate of the tax liability, including related interest charges, in the current tax liability. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax laws. Whilst management believes they have adequately provided for the probable outcome of these matters, future results may include favourable or unfavourable adjustments to these estimated tax liabilities in the period the assessments are made, or resolved, or when the status of limitation lapses. The final outcome of tax examinations may result in a materially different outcome than assumed in the tax liabilities. Xstrata plc Annual Report 2006 | 197 12. Earnings Per Share US$m 2006 2005 Continuing operations: Profit before exceptional items attributable to ordinary equity holders of the parent from continuing operations Exceptional items from continuing operations Profit attributable to ordinary equity holders of the parent from continuing operations Interest in respect of convertible borrowings Convertible borrowings interest rate swap fair value hedge movement Profit attributable to ordinary equity holders of the parent for diluted earnings per share from continuing operations Total operations: Profit before exceptional items attributable to ordinary equity holders of the parent from continuing operations Exceptional items from continuing operations Profit attributable to ordinary equity holders of the parent from continuing operations Profit/(loss) attributable to ordinary equity holders of the parent from discontinued operations Profit attributable to ordinary equity holders of the parent Interest in respect of convertible borrowings Convertible borrowings interest rate swap fair value hedge movement Profit attributable to ordinary equity holders of the parent for diluted earnings per share Weighted average number of shares (000) excluding own shares: For basic earnings per share Effect of dilution: – Free shares and share options (000) – Convertible borrowings For diluted earnings per share Basic earnings per share (US$) Continuing operations: – before exceptional items – exceptional items Discontinued operations: – before exceptional items – exceptional items Total: – before exceptional items – exceptional items Diluted earnings per share (US$) Continuing operations: – before exceptional items – exceptional items Discontinued operations: – before exceptional items – exceptional items Total: – before exceptional items – exceptional items 3,350 (1,403) 1,947 38 (1) 1,984 3,350 (1,403) 1,947 – 1,947 38 (1) 1,984 771,820 9,441 50,294 831,555 1,660 42 1,702 41 (19) 1,724 1,660 42 1,702 4 1,706 41 (19) 1,728 684,196 5,394 73,695 763,285 4.34 (1.82) 2.52 – – – 4.34 (1.82) 2.52 2.42 0.06 2.48 – 0.01 0.01 2.42 0.07 2.49 4.07 (1.68) 2.39 – – – 4.07 (1.68) 2.39 2.20 0.06 2.26 – 0.01 0.01 2.20 0.07 2.27 198 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 12. Earnings Per Share (continued) Basic earnings per share is calculated by dividing the net profit for the year attributable to the equity holders of the parent company by the weighted average number of ordinary shares outstanding for the year, excluding own shares. Adjustments are made for continuing and discontinued operations and before exceptional items and after exceptional items as outlined above, to present a meaningful basis for analysis. Diluted earnings per share is based on basic earnings per share adjusted for the potential dilution if Director and employee free shares and share options are exercised and the convertible bonds and debentures are converted into ordinary shares. An adjustment is also made to net profit for the interest in respect of the convertible borrowings and related hedging. On 30 October 2006, 235,787,596 ordinary shares were issued under a rights issue which was structured as an issue of one new ordinary share at a price of GBP 12.65 per share for every three existing ordinary shares held. The theoretical ex-rights price for an ordinary share was GBP19.51. The 2005 comparative earnings per share have been restated after applying a factor of 0.9 in order to adjust for the bonus element of the rights issue and the 2006 figures have also been adjusted for this bonus element. On 31 January 2007, a further 4 million ordinary shares were issued by the Company to the ESOP (refer to note 26). In February 2007, 22,832,325 ordinary shares were issued as a result of conversions by the holders of the Convertible Bonds (refer to note 29). The 2006 earnings per share figures would not be significantly different had these shares been issued during in 2006. 13. Dividends Paid and Proposed US$m 2006 2005 Declared and paid during the year: Final dividend for 2005 – 22.4 cents per ordinary share (2004 – 14.3 cents per ordinary share) Interim dividend for 2006 – 11.6 cents per ordinary share (2005 – 8.1 cents per ordinary share) 159 92 251 100 54 154 Proposed for approval at the Annual General Meeting (not recognised as a liability as at 31 December): Final dividend for 2006 – 30 cents per ordinary share (2005 – 22.4 cents per ordinary share) 281 150 Dividends declared in respect of the year ended 31 December 2006 will be paid on 18 May 2007. As stated in note 26, own shares held in the ESOP and by the ECMP have waived the right to receive dividends. The dividends per share declared and paid prior to 30 October 2006 have been adjusted by the rights issue bonus adjustment factor of 0.9 (refer to note 12). Xstrata plc Annual Report 2006 | 199 14. Intangible Assets Export rights* Computer Technology software & patents* development US$m Goodwill* Other 2006 At 1 January 2006 Acquisitions Additions Amortisation charge Disposals Impairment charge Translation adjustments At 31 December 2006 At 1 January 2006: Cost Accumulated amortisation Net carrying amount At 31 December 2006: Cost Accumulated amortisation Net carrying amount *Purchased as part of business combinations 1,130 – – – (26) – (96) 1,008 1,130 – 1,130 1,008 – 1,008 229 7,557 – – – (1,378) 14 6,422 229 – 229 7,801 (1,379) 6,422 53 – – (3) – – 3 53 60 (7) 53 64 (11) 53 16 7 16 (6) – – 1 34 25 (9) 16 47 (13) 34 2 260 – (14) – – 2 250 2 – 2 264 (14) 250 1,430 7,824 16 (23) (26) (1,378) (76) 7,767 1,446 (16) 1,430 9,184 (1,417) 7,767 US$m Export rights* Goodwill* Technology patents* Computer software & development Other 2005 At 1 January 2005 Acquisitions Additions Amortisation charge Translation adjustments At 31 December 2005 At 1 January 2005: Cost Accumulated amortisation Net carrying amount At 31 December 2005: Cost Accumulated amortisation Net carrying amount *Purchased as part of business combinations 1,245 – – – (115) 1,130 1,245 – 1,245 1,130 – 1,130 211 51 – – (33) 229 211 – 211 229 – 229 59 – – (3) (3) 53 64 (5) 59 60 (7) 53 7 – 13 (4) – 16 12 (5) 7 25 (9) 16 2 – – – – 2 12 (10) 2 2 – 2 1,524 51 13 (7) (151) 1,430 1,544 (20) 1,524 1,446 (16) 1,430 200 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 14. Intangible Assets (continued) The Group has a 20.91% interest in the service organisation, Richards Bay Coal Terminal Company Limited, acquired in a business combination, through which the shareholders gain access to export markets enabling them to realise higher coal sales prices than in the domestic market. Previously, the Directors regarded the right to export coal afforded by the interest in the terminal to have an indefinite life, as the operations utilising the terminal had appropriate reserves (including undeveloped reserves) to allow the use of the terminal for an indefinite period. Further, the land on which the terminal operates is leased on a long term basis from the state owned ports authority. There has been a history of lease renewal and extension by Richards Bay Coal Terminal Company Limited and it is the intention to continually renew the long term lease. Accordingly, these coal export rights have not been amortised but have been subject to an annual impairment review. In light of the approval of the Goedgevonden project subsequent to year end, the Directors reassessed whether it is still appropriate to treat this as an indefinite life asset and has concluded that it would be appropriate to begin amortisation prospectively in 2007 based on an updated estimate of its useful lives. The Group acquired the right to market to third parties various leading technologies for the mining, mineral processing and metals extraction industries, in a business combination. The technology patents are amortised over their useful economic lives of 20 years to June 2023. Computer software and software development is being amortised over their useful economic lives of three years. Other intangible assets is mainly comprised of a long-term feed contract held by the Group’s nickel business unit. This contract is being amortised over its remaining six year contract term. The disposal of a portion of the export rights which occurred during 2006 was the result of the transaction with ARM (refer to note 7). 15. Impairment Testing – Goodwill and Indefinite Life Intangibles Export rights US$m 2006 2005 Coal export rights carrying value: Coal Africa 1,008 1,130 As outlined in note 14 during 2006, the Group’s export right asset was deemed to have an indefinite life. For the purpose of impairment testing, this asset has been allocated to the Coal – Africa Cash-generating unit. Impairment testing is undertaken annually, and whenever there are indicators of impairment. The most recent test was undertaken at 31 December 2006 and in assessing the asset for impairment, the carrying amount of the cash-generating unit has been compared with its recoverable amount. The recoverable amount of the coal export rights in Africa has been determined based on a value-in-use calculation. Value-in-use is based on cash flows expected to be generated by the mines that rely on the coal export right. Such cash flows are projected for a period up to the date that mining ceases, based on management’s current expectation. This date depends on a number of variables, including the recoverable reserves and the forecast selling price for such production. Cash flows have been projected for a maximum of 36 years (2005: 40 years). Xstrata plc Annual Report 2006 | 201 15. Impairment Testing – Goodwill and Indefinite Life Intangibles (continued) Goodwill Goodwill has been allocated to the following reportable segments, or when appropriate to a lower level of cash-generating unit, which are expected to benefit from the asset. The carrying values of goodwill by cash generating unit are as follows: US$m 2006 2005 Coal – Colombia Chrome – Africa Copper – Americas* Copper – Americas North Copper – Americas South Nickel – Americas North Nickel – Americas South Nickel – Africa Nickel – Australasia Zinc Lead* Zinc Lead – Americas North Zinc Lead – Americas South Zinc Lead – Australasia Zinc Lead – Europe Aluminium – Americas North 464 46 1,185 257 1,252 589 213 45 46 1,546 194 160 9 198 218 6,422 – 51 – – – – – – – – – – – 178 – 229 *Net of the impairment loss discussed below. The goodwill recognised in 2006 arose on the Cerrejón, Tintaya and Falconbridge acquisitions (refer to note 7). As outlined in Note 7, the US$464 million goodwill recognised on the Cerrejón acquisition and the US$125 recognised Tintaya acquisition, relate to the requirement to recognise a deferred tax liability, calculated as the difference between the tax effect of the fair value of assets and liabilities acquired and their tax bases. US$6,968 million goodwill was recognised on the Falconbridge acquisition (refer to note 7). Of this amount US$2,859 million relates to the requirement to create a deferred tax liability, whilst US$4,109 million relates to goodwill recognised on the acquisition of 80.1% of the company in 2006. The Group performs goodwill impairment testing on an annual basis and when there are indicators of impairment. The most recent test was undertaken at 31 December 2006. In assessing whether goodwill has been impaired, the carrying amount of the cash-generating unit or reportable segment is compared with its recoverable amount. For the purpose of goodwill impairment testing, recoverable amounts have been determined based on value in use calculations. Value in use is based on the cash flows expected to be generated from mines, smelting and refining operations included within the cash-generating units or reportable segments. Cash flows are projected for periods up to the date mining and refining ceases based on management’s current expectations. This date depends on a number of variables, including recoverable reserves and resources, the forecast selling prices for such production and the treatment charges received from the refining operations. Cash flows have been projected for a maximum of 21 years (2005: 20 years). 202 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 15. Impairment Testing – Goodwill and Indefinite Life Intangibles (continued) Key assumptions The key assumptions used in the value in use calculations for goodwill and the export right asset are: – – – – recoverable reserves and resources; commodity prices; treatment charges receivable by smelting and refining operations; and discount rates. As outlined above, economically recoverable reserves and resources are based on management’s current expectation, based on the availability of reserves at mine sites and exploration and evaluation work undertaken by appropriately qualified persons. Long-term commodity prices and treatment charges are based on external market consensus forecasts. Specific prices are determined from information available in the market after considering the nature of the commodity produced and long term market expectations. Discount rates utilised are outlined below, and represent the nominal pre-tax rates that reflect the current market assessments of the time value of money and the risks specific to the cash-generating unit or reportable segment for which cash flows have not been adjusted. These rates are based on the weighted average cost of capital specific to each cash-generating unit or reportable segment and the currency of the cash flows generated. These rates have been calculated with reference to information from third party advisors. 2006 2005 Coal – South Africa Chrome – Africa Copper – Americas Zinc Lead Zinc Lead – Europe Impairment losses The impairment losses recognised as an exceptional item in the income statement relates to the following: US$m 10.2% 11.1% 17.2% 13.3% 13.6% 11.3% 13.2% – – 8.7% 2006 2005 Goodwill: Copper – Americas Zinc Lead 598 780 1,378 – – – The acquisition of Falconbridge was completed in two stages. Xstrata acquired 19.9% of Falconbridge at CAD28 per share in 2005, before acquiring the remaining 80.1% in 2006 at a price of CAD62.50 per share. The average price paid per share for the 100% interest was CAD56.44. Xstrata’s ability to average the purchase price paid for the second tranche of shares over the full purchase provided Xstrata with a compelling competitive advantage and was a significant factor in the success of the transaction. Under IFRS, this advantage cannot be recognised, as goodwill is calculated separately for each transaction. This accounting treatment has resulted in the creation of additional goodwill of US$1.5 billion. Xstrata has completed a detailed fair value assessment of the assets acquired and, in accordance with IFRS, tested goodwill for impairment. As a consequence, the company has determined that an impairment charge of US$1,378 million is appropriate. Xstrata plc Annual Report 2006 | 203 15. Impairment Testing – Goodwill and Indefinite Life Intangibles (continued) Sensitivity to changes in assumptions Management is of the opinion that no reasonably possible change in the key assumptions above, would result in an impairment expense being recognised, except in relation to goodwill Copper – Americas and goodwill – Zinc Lead. As a result of the impairment expense above, the goodwill allocated to Copper Americas and Zinc Lead, is now recorded at its recoverable amount and therefore any adverse changes in key assumptions would cause a further impairment loss to be recognised. These key assumptions are discussed below: Recoverable reserves and resources – The total recoverable reserve is 1,680 million tonnes of ore and resource is 1,279 million tonnes of ore for Copper Americas. The total recoverable reserves is 180 tonnes of ore and resource is 563 tonnes of ore for Zinc Lead. As outlined above this is based on management’s current estimate, using appropriate exploration and evaluation techniques. Commodity prices – In performing the value in use calculation for Copper Americas commodity prices have been based on external market consensus forecasts. The copper prices range from US$1.00 per pound to US$3.28 per pound, varying in accordance with the year the sale is expected to occur. Treatment charges received from smelting and refining – In performing the value in use calculation for Zinc Lead treatment charges have been estimated to be in the range of US$150 to US$250 per tonne for zinc and US$110 per tonne for lead refining fees, based on the year of processing. As outlined above, these prices are based on external market consensus forecasts. Commodity prices – In performing the value in use calculation for Zinc Lead commodity prices have been based on external market consensus forecasts. The prices range from US$1,124 to US$3,241 per tonne for zinc and US$639 to US$1,146 per tonne for lead, varying in accordance with the year the sale is expected to occur. 16. Property, Plant and Equipment Land and buildings Mining properties and leases Plant and equipment Capital works in progress US$m 2006 At 1 January 2006, net of accumulated depreciation Acquisitions Additions Disposals Rehabilitation provision adjustments Reclassifications Depreciation charge Translation adjustments At 31 December 2006, net of accumulated depreciation At 1 January 2006: Cost Accumulated depreciation Net carrying amount At 31 December 2006: Cost Accumulated depreciation Net carrying amount 689 2,013 103 (8) – 20 (120) 52 2,749 855 (166) 689 3,028 (279) 2,749 3,722 15,625 212 (27) 88 56 (575) 144 19,245 4,378 (656) 3,722 20,504 (1,259) 19,245 3,124 3,061 636 (22) – 118 (526) 134 6,525 4,132 (1,008) 3,124 8,048 (1,523) 6,525 551 498 702 – – (194) – 11 1,568 553 (2) 551 1,569 (1) 1,568 8,086 21,197 1,653 (57) 88 – (1,221) 341 30,087 9,918 (1,832) 8,086 33,149 (3,062) 30,087 204 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 16. Property, Plant and Equipment (continued) Land and buildings Mining properties and leases Plant and equipment Capital works in progress US$m 2005 At 1 January 2005, net of accumulated depreciation Acquisitions Additions Disposals Rehabilitation provision adjustments Reclassifications Depreciation charge Impairments recognised (refer to note 11) Translation adjustments At 31 December 2005, net of accumulated depreciation At 1 January 2005: Cost Accumulated depreciation Net carrying amount At 31 December 2005: Cost Accumulated depreciation Net carrying amount 667 5 26 (17) – 125 (35) – (82) 689 770 (103) 667 855 (166) 689 4,006 – 188 (1) 5 (40) (190) (4) (242) 3,722 4,451 (445) 4,006 4,378 (656) 3,722 3,149 20 463 (4) – 40 (346) – (198) 3,124 3,997 (848) 3,149 4,132 (1,008) 3,124 379 – 329 (6) – (125) – (1) (25) 551 383 (4) 379 553 (2) 551 8,201 25 1,006 (28) 5 – (571) (5) (547) 8,086 9,601 (1,400) 8,201 9,918 (1,832) 8,086 Land and buildings include non-depreciating freehold land amounting to US$214 million (2005 US$163 million). Mining properties and leases at 31 December 2006 include capitalised exploration costs of US$245 million (2005 US$19 million) and capitalised deferred stripping costs of US$304 million (2005 US$141 million). US$nil (2005 US$11 million) of interest and US$89 million (2005 US$72 million) of deferred stripping costs were capitalised during the year. The carrying value of plant and equipment held under finance leases and hire purchase contracts at 31 December 2006 is US$236 million (2005 US$237 million). Leased assets and assets under hire purchase contracts are pledged as security for the related finance leases and hire purchase liabilities. The carrying value of other property, plant and equipment pledged as security is US$nil (2005 US$nil). No interest was capitalised during 2006 or 2005 and there is no capitalised interest within property, plant and equipment at 31 December 2006 and 2005. The carrying value of property, plant and equipment at 31 December 2006 that is temporarily idle is US$36 million (2005 US$3 million), retired from active use and held for resale is US$nil (2005 US$nil). The Group has made commitments to acquire property, plant and equipment totalling US$227 million at 31 December 2006 (2005 US$107 million). Xstrata plc Annual Report 2006 | 205 17. Biological Assets US$m Cattle 2006 At 1 January 2006 Net gain/(loss) from fair value less estimated selling cost adjustments Translation adjustments At 31 December 2006 US$m Cattle 13 1 1 15 Plantations 13 1 1 15 2005 At 1 January 2005 Additions Disposal of subsidiaries Disposals Net gain/(loss) from fair value less estimated selling cost adjustments At 31 December 2005 13 2 – (3) 1 13 19 – (19) – – – 32 2 (19) (3) 1 13 Biological assets are stated at fair value less estimated selling costs, which has been determined based on independent valuations as at 31 December 2006 and 2005, on the basis of open market value, supported by market evidence. As at 31 December 2006, the Group owned 45 thousand (2005: 46 thousand) cattle. The plantation was disposed in January 2005 and had previously been pledged as security against a US$12 million loan that was included as part of the assets and liabilities disposed (refer to note 8). 18. Inventories US$m 2006 2005 Current: Raw materials and consumables Work in progress Finished goods Non-current: Work in progress 1,294 1,377 869 3,540 75 75 282 268 341 891 71 71 Non-current inventories comprises long term ore stockpiles that are not planned to be processed within one year. 19. Trade and Other Receivables US$m 2006 2005 Current: Trade debtors Advances Employee entitlement receivables (refer to note 31) Recoverable sales tax Other debtors Non-current: Employee entitlement receivables (refer to note 31) Recoverable sales tax Other debtors 2,380 115 5 282 44 2,826 25 25 34 84 1,033 13 – 80 12 1,138 22 20 15 57 206 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 20. Investment in Associates As outlined in note 7, the Group obtained control of Falconbridge on 15 August 2006. For a portion of 2005, the Group’s investment in Falconbridge was accounted for as an associate. Specifically from 14 August 2005 until the announcement of Inco Limited’s proposed friendly takeover offer to acquire Falconbridge for CAD34.00 per share on 11 October 2005, equity accounting was applied. After the announcement, equity accounting was ceased as the Group no longer had significant influence over the investment and the investment was classified as an available-for-sale financial asset (refer to note 22). The following is a summary of the financial results for Falconbridge during the period it was treated as an associate: US$m 2006 2005 Share of associate’s revenue and profit during the period classified as an associate: Revenue EBITDA EBIT Profit for the year The reporting date of Falconbridge was the same as the Group, being 31 December. – – – – 250 68 45 21 The Group has interests in coal terminals, through which the shareholders gain access to export markets and a 25% interest in the Noranda Income Fund which owns a zinc refinery in Salaberry–de-Valleyfield, Quebec. The Noranda Income Fund is listed on the Toronto stock exchange and the fair value of the Group’s investment was US$106 million at 31 December 2006 (2005 US$nil). The companies which own the coal terminals are not listed so there is no published quoted price for the fair value of these investments. The reporting dates for all associates is the same as for the Group, being 31 December. The following is a summary of the financial information of the above associates: US$m 2006 2005 Share of associates’ balance sheet: Non-current assets Current assets Total assets Non-current liabilities Current liabilities Total liabilities Net assets Carrying amount of the investment Share of associates’ revenue and profit: Revenue EBITDA EBIT Net interest paid Income tax expense Profit for the year 230 93 323 (88) (56) (144) 179 179 48 16 64 (19) (1) (20) 44 44 116 6 2 2 – 4 13 5 4 (1) (1) 2 Xstrata plc Annual Report 2006 | 207 21. Interests in Joint Venture Entities The Group has various interests in jointly controlled entities, operations and assets as outlined in note 36. These interests are accounted for in the manner outlined in note 6. The following is a summary of the financial information of the Group’s jointly controlled entities in South Africa, South America and New Caledonia: US$m 2006 2005 Share of joint venture’s balance sheets: Non-current assets Current assets Total assets Non-current liabilities Current liabilities Total liabilities Net assets Net assets consolidated Share of joint ventures’ revenue and profit: Revenue Cost of sales (before depreciation and amortisation) Distribution costs Administration expenses (before depreciation and amortisation) EBITDA Depreciation and amortisation EBIT Finance income Finance costs Profit before tax Income tax expense Profit for the year In 2005, the Group held no interests in jointly controlled entities. 22. Available-for-sale Financial Assets US$m 9,592 621 10,213 (2,064) (678) (2,742) 7,471 7,471 – – – – – – – – 1,063 (273) (62) (21) 707 (175) 532 9 (14) 527 (164) 363 – – – – – – – – – – – – 2006 2005 Shares – listed Shares – unlisted Royalty contract 58 12 90 160 2,321 4 – 2,325 Available-for-sale financial assets consist of a long-term royalty income contract and investments in listed and unlisted ordinary shares that have no fixed maturity date or coupon rate. These investments are held for strategic purposes. In 2005, the listed shares mainly related to the Group’s 19.9% interest in Falconbridge (refer to note 7 and 20). In 2006, the listed shares relate to companies in the mining industry. The listed shares are carried at fair value. Unlisted shares mainly comprise interests in ports in Australia used to export coal and are carried at fair value. 208 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 23. Derivative Financial Assets US$m 2006 2005 Current: Commodity cash flow hedges Foreign currency cash flow hedges Other commodity derivatives Non-current: Commodity cash flow hedges Foreign currency cash flow hedges Fair value interest rate swap hedge Other commodity derivatives Other foreign currency derivatives Total 24. Other Financial Assets US$m – 9 2 11 – 1 8 – 48 57 68 16 – 1 17 8 – – 1 – 9 26 2006 2005 Current: Loans to joint venture partners Security deposits Non-current: Energy contracts at fair value through profit and loss Fair value hedge (refer to notes 28 and 37) Loans to joint venture partners Rehabilitation trust fund Other Total – 2 2 8 – 214 36 41 299 301 34 – 34 – 15 – 35 6 56 90 Loans to joint venture partners A loan to Merafe was made on establishment of the Chrome PSV. At 31 December 2006, US$nil (2005 US$3 million) was interest free and US$21 million (2005 US$31 million) was subject to a floating interest rate based on South African prime rates. This loan is secured by the Group’s ability to acquire Merafe’s PSV assets at fair value in the event of default. A loan was made to African Rainbow Minerals Limited (ARM) on establishment of ARM Coal. At 31 December 2006, US$56 million (2005 US$nil) was subject to a floating interest rate based on South African prime rates. This loan is secured by the Group’s ability to acquire ARM Coal assets at fair value in the event of default. A loan has been made to the Koniambo joint venture partner. At 31 December 2006, US$116 million (2005 US$nil) was subject to a fixed interest rate of 9% per annum and is repayable by 31 March 2008. This loan is secured by the Group’s ability to acquire Koniambo’s assets at fair value in the event of default. A loan has been made to Barrick Gold Corporation for the Kabanga joint venture. At 31 December 2006, US$21 million (2005 US$nil) was interest free. This loan is secured by the Group’s ability to acquire Kabanga’s assets at fair value in the event of default. Xstrata plc Annual Report 2006 | 209 24. Other Financial Assets (continued) Rehabilitation trust fund The rehabilitation trust fund in South Africa receives cash contributions to accumulate funds for the Group’s rehabilitation liability relating to the eventual closure of the Group’s coal operations. Amounts are paid out from the trust fund following completion and approval of the rehabilitation work by the South African Department of Minerals and Energy. The contributions to the trust fund are placed with investment banks who are responsible for making investments in equity and money market instruments. The trust fund is to be used according to the terms of the trust deed and the assets are not available for the general purpose of the Group. The trust fund is carried at fair value. Other Other includes receivables from financial institutions for self insurance and employee benefits. 25. Cash and Cash Equivalents US$m 2006 2005 Cash at bank and in hand Short term deposits 622 1,238 1,860 154 370 524 The majority of cash at bank and in hand earns interest at floating rates of interest with a limited amount at fixed rates of interest and interest free. Short term deposits are made at call and for less than one week, dependent on the short term cash requirements of the Group and earn interest based on the respective short term deposit rates. The fair value of cash and cash equivalents at 31 December 2006 and 31 December 2005 approximates carrying value. For the purposes of the Consolidated Cash Flow Statement, cash and cash equivalents comprise the following at 31 December: US$m 2006 2005 Cash at bank and in hand Short term deposits Bank overdrafts (refer to note 30) 622 1,238 (143) 1,717 154 370 (3) 521 During the year, the Group entered into new finance leases and hire purchase contracts to purchase various items of plant and equipment for US$nil (2005 US$62 million), issued shares from the conversion of the convertible borrowings and issued shares to the ESOP for a market value of US$136 million (2005 US$19 million) which did not require the use of cash and cash equivalents and are not included in the net cash flow used in investing and financing activities in the Consolidated Cash Flow Statement. 210 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 26. Capital and Reserves US$m Authorised: 875,000,000 ordinary shares of US$0.50 each as at 1 January and 31 December 2005 and as at 1 January 2006 14,234,948,397 ordinary shares of US$0.50 each increase on 30 June 2006 15,109,948,397 ordinary shares of US$0.50 each as at 31 December 2006 50,000 deferred shares of GBP1.00 each as at 1 January and 31 December 2005 and as at 1 January and 31 December 2006 1 special voting share of US$0.50 as at 1 January and 31 December 2005 and as at 1 January and 31 December 2006 438 7,117 7,555 – – 7,555 Issued, called up and fully paid: 631,502,416 ordinary shares of US$0.50 each as at 1 January 2005 1,000,000 ordinary shares issued on 24 March 2005 to the ESOP 632,502,416 ordinary shares of US$0.50 each as at 31 December 2005 and 1 January 2006 3,000,000 ordinary shares issued on 28 March 2006 to the ESOP 32,543,344 ordinary shares issued on 22 May 2006 to institutional investors 235,787,596 ordinary shares issued on 30 October 2006 from a shareholder rights issue 39,317,027 ordinary shares issued on the exercise of convertible bonds during 2006 943,150,383 ordinary shares as at 31 December 2006 50,000 deferred shares of GBP1.00 each paid to GBP0.25 as at 1 January and 31 December 2005 and as at 1 January and 31 December 2006 1 special voting share of US$0.50 as at 1 January and 31 December 2005 and as at 1 January and 31 December 2006 Share Premium: As at 1 January 2005 1,000,000 ordinary shares issued on 24 March 2005 to the ESOP As at 31 December 2005 3,000,000 ordinary shares issued on 28 March 2006 to the ESOP 32,543,344 ordinary shares issued on 22 May 2006 to institutional investors 235,787,596 ordinary shares issued on 30 October 2006 from a shareholder rights issue 39,317,027 ordinary shares issued on the exercise of convertible bonds during 2006 As at 31 December 2006 Own shares: 7,481,271 ordinary shares of US$0.50 each as at 1 January 2005 26,079,250 ordinary shares purchased in the ECMP during the year 1,000,000 ordinary shares issued on 24 March to the ESOP 3,925 ordinary shares purchased in the ESOP during the year 1,509,582 ordinary shares disposed by the ESOP during the year 33,054,864 ordinary shares of US$0.50 each as at 31 December 2005 29,450,976 ordinary shares disposed by the ECMP on 19 May 2006 3,000,000 ordinary shares issued on 28 March to the ESOP 428,053 ordinary shares purchased in the ESOP during the year 1,611,519 ordinary shares purchased from shareholder rights issue on 30 October 2006 2,469,713 ordinary shares disposed by the ESOP during the year 6,173,747 ordinary shares of US$0.50 each as at 31 December 2006 315 1 316 1 16 118 20 471 – – 2,482 18 2,500 97 1,236 5,314 375 9,522 (91) (522) (19) – 16 (616) 572 (98) (11) (38) 37 (154) Xstrata plc Annual Report 2006 | 211 26. Capital and Reserves (continued) Issue of ordinary shares During March 2005, 1,000,000 shares were issued to the ESOP at a market price of GBP 10.20 per share. During March 2006, 3,000,000 shares were issued to the ESOP at a market price of GBP 18.72 per share. On 22 May 2006, 32,543,344 shares were issued to institutional investors at a market price of GBP 21.00 per share. During 2006, 64.3% of the US$600 million of convertible bonds were converted by the holders (refer to note 29). On 30 October 2006, 235,787,596 ordinary shares were issued under a rights issue which was structured as an issue of one new ordinary share at a price of GBP 12.65 per share for every three existing ordinary shares held. The net proceeds from the rights issue was US$5,432 million (after US$186 million of capital raising costs) and the number of shares in issue of Xstrata plc following the completion of the rights issue is 943,150,383. Deferred shares The holders of deferred shares do not have the right to receive notice of any general meeting of the Company nor the right to attend, speak or vote at any such general meeting. The deferred shares have no rights to dividends and, on a winding-up or other return of capital, entitle the holder only to the repayment of the amounts paid upon such shares after repayment of the nominal amount paid up on the ordinary shares, the nominal amount paid up on the special voting share plus the payment of GBP100,000 per ordinary share. The Company may, at its option, redeem all of the deferred shares in issue at any time (but subject to the minimum capital requirement of the Companies Act 1985) at a price not exceeding GBP1.00 for each share redeemed to be paid to the relevant registered holders of the shares. Special voting share Certain rights, that are inalienable under Swiss law, have been preserved in the Xstrata plc Articles of Association by creating a special voting share that carries weighted voting rights sufficient to defeat any resolution which could amend or remove these entrenched rights. The holder of the special voting share is the Law Debenture Trust Corporation plc which has entered into a voting agreement with the Company, specifying the conditions upon which it is entitled to exercise its right to vote. The special voting share does not carry a right to receive dividends and is entitled to no more than the amount of capital paid up in the event of liquidation. Own shares Own shares comprise shares of Xstrata plc held in the Employee Share Option Plan (ESOP) and held by Batiss Investments (Batiss) for the Equity Capital Management Program (ECMP). The shares acquired by the ESOP are either stock market purchases or share issues from the Company. The ESOP is used to co-ordinate the funding and manage the delivery of ordinary shares for options and free share awards under the Group’s employee award schemes (refer to note 35). The trustee of the ESOP is permitted to place the shares back into the market and may hold up to 5% of the issued share capital of the Company at any one time. At 31 December 2006, 6,173,747 (2005: 3,603,888) shares, equivalent to 0.7% (2005: 0.6%) of the total issued share capital, were held by the trust with a cost of US$154 million (2005 US$44 million) and market value of US$308 million (2005 US$84 million). The trust has waived the right to receive dividends from the shares that it holds. Costs relating to the administration of the trust are expensed in the period in which they are incurred. The shares acquired from the stock market by Batiss and held for the ECMP are used by the Group as a source of financing for future acquisitions, or placed back into the market. The decision as to when to place the shares in the market, use the shares to assist the Group in facilitating future transactions, or to repurchase shares for cancellation, is considered in light of the Group’s funding requirements and capital structure. 212 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 26. Capital and Reserves (continued) Batiss is not permitted to hold more than 10% of the issued share capital of the Company at any one time. Batiss has entered into an option agreement with Xstrata Capital Corporation A.V.V. (Xstrata Capital), a wholly owned subsidiary within the Xstrata Group, whereby Batiss has granted to Xstrata Capital a right to require Batiss to sell the purchased Xstrata shares to a third party (other than a subsidiary of Xstrata plc), as nominated by Xstrata Capital, at an exercise price of 1p per share. Under the option agreement, Xstrata Capital pays Batiss a premium for this right, the premium being the equivalent of the market price paid by Batiss for the shares plus associated costs less the 1p exercise price. This premium payment, together with funds from a subscription by Xstrata Capital for non-voting redeemable preference shares in Batiss, provides the funding for Batiss to acquire the shares in the market. These payments are sourced from the existing and future cash resources of Xstrata Capital. Xstrata Capital is able to exercise its right under the option agreement for a period of six years from the date of each purchase, but has not chosen to do so in either 2005 or 2006. Batiss has waived its right to receive dividends on the shares which it holds. At 31 December 2006, nil (2005: 29,450,976) shares, equivalent to nil% (2005: 4.7%) of the total issued share capital, were held by the trust with a cost of US$nil (2005 US$572 million) and market value of US$nil (2005 US$690 million). Costs relating to the administration of the trust are expensed in the period in which they are incurred. In 2006, the shares held at 31 December 2005 were used as a source of funding for the Cerrejón acquisition (refer to note 7). Consolidated changes in equity Attributable to equity holders of the parent Convertible borrowings – equity component US$m Issued capital Share premium Own shares Other reserves Retained earnings Total Minority interests Total equity At 1 January 2006 316 Recognised income and expenses – Issue of share capital 155 Own share purchases – Own share disposals – Cost of IFRS 2 equity settled share-based compensation plans – Acquisition of subsidiaries – Redemption of minority interests – Dividends paid – At 31 December 2006 471 2,500 – 7,022 – – – – – – 9,522 (616) – (136) (11) 609 – – – – (154) 119 – (41) – – – – – – 78 3,054 1,528 – – – – – – – 4,582 2,192 1,995 – – 525 42 – – (251) 4,503 7,565 3,523 7,000 (11) 1,134 42 – – (251) 19,002 572 405 – – – – 45 (95) (207) 720 8,137 3,928 7,000 (11) 1,134 42 45 (95) (458) 19,722 Xstrata plc Annual Report 2006 | 213 26. Capital and Reserves (continued) Attributable to equity holders of the parent Convertible borrowings – equity component US$m Issued capital Share premium Own shares Other reserves* Retained earnings Total Minority interests Total equity At 1 January 2005 Recognised income and expenses Issue of share capital New borrowings issued Own share purchases Own share disposals Cost of IFRS 2 equity settled share-based compensation plans Exercise of pre-IFRS 2 option awards Dividends paid At 31 December 2005 *Other reserves US$m 315 – 1 – – – – – – 316 2,482 – 18 – – – – – – 2,500 (91) – (19) – (522) 16 – – – (616) 63 – – 56 – – – – – 119 3,493 (439) – – – – – – – 3,054 614 1,707 – – – 9 20 (4) (154) 2,192 6,876 1,268 – 56 (522) 25 20 (4) (154) 7,565 506 214 – – – – – – (148) 572 7,382 1,482 – 56 (522) 25 20 (4) (302) 8,137 Revaluation reserves Other reserves Net unrealised gains Foreign currency translation Total At 1 January 2005 Available-for-sale financial assets Losses on cash flow hedges Realised losses on cash flow hedges Recycled foreign currency translation net gains Foreign currency translation differences Deferred tax At 31 December 2005 Revaluation of property, plant and equipment Available-for-sale financial assets Losses on cash flow hedges Realised gains on disposal of available-for-sale financial assets Reversal of revaluation surplus on available-for-sale financial assets* Realised losses on cash flow hedges Recycled foreign currency translation net losses Foreign currency translation differences Deferred tax At 31 December 2006 – – – – – – – – – 1,528 – – – – – – – – 1,528 1,528 1,241 – – – – – – – 1,241 – – – – – – – – – – 1,241 2 398 (314) 128 – 4 (24) 192 194 – 1,892 (78) (63) (2,205) 125 – (5) 59 (275) (81) 2,250 – – – (67) (582) 18 (631) 1,619 – – – – – – 47 249 (21) 275 1,894 3,493 398 (314) 128 (67) (578) (6) (439) 3,054 1,528 1,892 (78) (63) (2,205) 125 47 244 38 1,528 4,582 * Relates to gains made on the Group’s investment in Falconbridge whilst the investment was treated as an available-for-sale financial asset (refer to note 22). In accordance with the Group’s accounting policy, on obtaining control of Falconbridge, the unrealised gains have been reversed and the acquisition accounting in note 7 was adopted. 214 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 26. Capital and Reserves (continued) Revaluation reserves This reserve principally records the re-measurement from cost of the 19.9% interest held in Falconbridge at 31 December 2005, to the fair value of 19.9% of the identifiable net assets of Falconbridge on 15 August 2006, the date the Group obtained control of Falconbridge (refer to note 7). Other reserves This reserve principally originated during 2002 from the merger of Xstrata AG into Xstrata plc (US$279 million) and the issue of shares from the acquisition of the Duiker and Enex Group’s of US$935 million. Net unrealised gains/(losses) reserve This reserve records the re-measurement of available-for-sale financial assets to fair value (refer to note 22) and the effective portion of the gain or loss on cash flow hedging contracts (refer to note 23, 30 and 37). Deferred tax is provided on the re-measurement at tax rates enacted or substantively enacted. Foreign currency translation reserve This is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. It is also used to record the exchange differences from the translation of quasi equity inter-company loans in foreign operations. On disposal or partial disposal of a foreign entity or repayment of a quasi equity loan, the deferred accumulated amount recognised in this reserve is transferred to the income statement. 27. Trade and Other Payables US$m 2006 2005 Current: Trade payables Sundry payables Interest payable Accruals and other payables Non-current: Accruals and other payables Total 2,290 326 23 471 3,110 69 69 3,179 598 108 17 223 946 10 10 956 All current payables are expected to be settled in the next 12 months and non-current payables are expected to be settled within 13 years (2005: 6 years). Xstrata plc Annual Report 2006 | 215 28. Interest-bearing Loans and Borrowings US$m 2006 2005 Current: Bank overdrafts Syndicated bank loans – unsecured Term bank loan – unsecured Bank loans – other unsecured Capital market notes Obligations under finance leases and hire purchase contracts (i) Bank loan issue costs Non-current: Syndicated bank loans – unsecured Bank loans – other unsecured Capital market notes Minority interest loans Obligations under finance leases and hire purchase contracts (i) Preference shares Other loans Bank loan issue costs Non-current: Convertible borrowings (refer note 29) Convertible borrowings issue costs Total Less cash and cash equivalents (refer note 25) Net debt* *Net debt is defined as loans and borrowings net of cash and cash equivalents. 143 1,677 – 39 5 147 (21) 1,990 7,416 345 4,627 81 95 304 139 (61) 12,946 527 (2) 525 15,461 (1,860) 13,601 3 106 600 7 14 15 (1) 744 971 6 262 81 214 – 1 (2) 1,533 866 (8) 858 3,135 (524) 2,611 i. Secured over specific items of plant and equipment (refer to note 16). Syndicated Loan Facility On 28 May 2004 Xstrata plc and certain subsidiary undertakings of the Group, entered into a US$1,400 million committed multi-currency syndicated loan. The loan was comprised of two tranches, a US$1,000 million five year facility and a US$400 million 364-day facility, with a 364-day term out option. During the period the 364-day facility was extended for a further 364-day period to 26 May 2006. The interest payable on the syndicated loan facility was at a rate based on the London inter-bank offered rate (LIBOR) plus 50 basis points for the five-year element and 40 basis points for the 364-day tranche with a utilisation fee of five basis points if usage exceeds 66.6% of the facility. The Company was liable to pay a commitment fee on the un-drawn portion of the syndicated facility at a rate per annum equal to 20 basis points and 10 basis points on the five-year and 364-day elements respectively, payable quarterly in arrears. This facility was re-financed during 2006. On 8 August 2006 Xstrata plc and certain subsidiary undertakings of the Group, entered into a US$9,500 million committed multi-currency syndicated loan to fund a portion of the Falconbridge acquisition. The loan is comprised of four tranches, a US$3,353 million three year facility, a US$1,117 million five year facility, a US$3,353 million five year revolving facility and a US$1,677 million 364-day facility, with a 364-day term out option. The syndicated loan facility bears interest at a rate based on the London inter-bank offered rate (LIBOR) plus 60 basis points for the three year element, 70 basis points for the five year elements and 50 basis points for the 364-day tranche. The Group is liable to pay a commitment fee on the un-drawn portion of the syndicated facility at a rate per annum equal to 35% of the applicable margin payable on the three and five year tranches and 30% of the applicable margin on the 364-day tranche, payable quarterly in arrears. 216 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 28. Interest-bearing Loans and Borrowings (continued) Term Bank Loan On 18 August 2005 Xstrata plc and certain subsidiary undertakings of the Group, entered into a US$600 million 364-day fully drawn advance loan facility. The interest payable on the term loan was at a rate based on LIBOR plus 40 basis points per annum. This facility was re-financed during 2006. Bridge Facility On 8 May 2006, the Group entered into a US$2,500 million committed multi-currency 364-day loan facility to partly finance the Cerrejón and Tintaya acquisitions (refer to note 7). The interest payable on the loan was based on LIBOR plus 40 basis points per annum. The Group was liable to pay a commitment fee on the un-drawn portion of the facility at a rate per annum equal to 25 per cent on the applicable margin, payable quarterly in arrears. This facility was re-financed prior to 31 December 2006. Equity and Debt bridge Facilities The acquisition of Falconbridge in August 2006 (refer to note 7) was initially partly financed with equity and debt bridge facilities of US$7,000 million and US$2,500 million respectively. The equity and debt bridge facilities bears interest at rates based on LIBOR plus 40 basis points. The equity and debt bridge facilities were repaid following the Rights Issue in October 2006 (refer to note 26) and a global capital market notes issue in November 2006 (refer below). Capital Market Notes As at 31 December 2006, other unsecured private placements included: Fixed or floating interest rate Effective interest Rate % in 2006 Effective interest Rate % in 2005 Facility Denomination At 31 Dec 06 US$m Maturity At 31 Dec 05 US$m Series A senior unsecured notes (a) Series B senior unsecured notes (a) Series B senior unsecured notes (a) Series B senior unsecured notes (a) Unsecured notes (b) Unsecured notes (b) Unsecured notes (b) Senior debentures (c) Senior debentures (c) Senior debentures (c) Senior debentures (c) Senior debentures (c) Senior debentures (c) Senior debentures (c) Senior debentures (c) US$ US$ US$ US$ US$ US$ US$ CAD US$ US$ US$ US$ US$ US$ US$ 150 – 50 50 500 750 1,000 155 328 266 317 354 246 234 232 4,632 Fixed – Fixed Fixed Floating Fixed Fixed Fixed Fixed Fixed Fixed Fixed Fixed Fixed Fixed 5.90 – 6.75 7.00 5.72 5.50 5.80 4.89 6.03 5.88 6.06 6.34 6.16 6.39 6.77 Jun Dec Jun Jun Nov Nov Nov Dec Feb Jun Jul Oct Jun Jun Jun 08 06 11 11 09 11 16 08 11 12 12 15 15 17 35 159 9 54 54 – – – – – – – – – – – 276 5.90 3.22 6.75 7.00 – – – – – – – – – – – (a) (b) (c) An Australian subsidiary has designated the series A and B senior unsecured notes as a fair value hedge of an investment in South America (refer to notes 28 and 37). The hedge is being used to reduce exposure to foreign currency risk. In November 2006, the Group issued US$2,250 million of capital market notes to refinance existing debt facilities. The notes are comprised of three tranches, a US$1,000 million ten year note at a fixed interest rate of 5.8%, a US$750 million five year note at a fixed interest rate of 5.5% and a US$500 million three year note that bears interest at a rate based on LIBOR plus 35 basis points. The fixed interest notes were issued by Xstrata Finance (Canada) Limited and the floating rate note was issued by Xstrata Finance (Dubai) Limited. The Xstrata Finance (Dubai) Limited issue was guaranteed by Xstrata plc, Xstrata (Schweiz) AG and Xstrata Finance (Canada) Limited. The Xstrata Finance (Canada) Limited issues were guaranteed by Xstrata plc, Xstrata (Schweiz) AG and Xstrata Finance (Dubai) Limited. The senior debentures were assumed by the Group through the acquisition of Falconbridge (refer to note 7). Pursuant to the terms of the note indentures as amended by supplemental indentures, Xstrata plc has fully and unconditionally guaranteed in favour of the holders of the senior debentures the payment, within 15 days of when due, of all financial liabilities and obligations of Falconbridge limited to such holders under the terms of the senior debentures. Xstrata plc Annual Report 2006 | 217 28. Interest-bearing Loans and Borrowings (continued) Preference shares As at 31 December 2006, unsecured preference shares included: Fixed or floating interest rate Effective interest Rate % in 2005 Facility Denomination At 31 Dec 06 US$m Interest Rate % Maturity At 31 Dec 05 US$m Preference shares series 2 Preference shares series 3 Preference shares series H CAD CAD CAD 103 67 134 304 Floating Fixed Fixed 5.10 4.58 6.50 – Mar 09 Mar 08 – – – – – – – The preference shares were assumed by the Group through the acquisition of Falconbridge (refer to note 7). At the acquisition date, Falconbridge had additional preference shares outstanding. The Group completed the redemption of all of the outstanding preferred shares, series F and series G and preferred shares series 1 for an aggregate cash consideration of CAD306 million (US$270 million) on 1 November 2006. Following the completion of the preferred share redemption, the Toronto Stock Exchange halted trading in and de-listed the series F shares and the series G shares from the TSX. Pursuant to the terms of a guarantee indenture, Xstrata plc has fully and unconditionally guaranteed in favour of the holders of the preference shares the payment, within 15 days of when due, of all financial liabilities and obligations of Falconbridge limited to such holders under the terms of the preference shares. Bank Loans – other unsecured Other bank loans includes: – Debts of proportionally consolidated joint ventures of US$139 million (2005 US$nil) which bear interest at a rate based on LIBOR plus 175 basis points, repayable in August 2011 and US$201 million (2005 US$nil) which bear interest at a rate based on LIBOR plus 31 basis points, repayable by December 2011; US$40 million (2005 US$nil) which bear interest at a rate based on LIBOR plus 85 basis points, repayable in January 2008; and ZAR denominated borrowings of US$4 million (2005 US$13 million) that are subject to floating interest rates based on Johannesburg inter bank acceptance rate (JIBAR) with an average floating interest rate of 9.0% per annum during 2006 (2005: 8.7% per annum), repayable by January 2010. – – Bank overdrafts – unsecured Bank overdrafts are subject to local and US$ prime floating interest rates in which they have been drawn down. The majority of the bank overdrafts are denominated in CAD. Minority Interest Loans Minority interest loans include US$81 million (2005 US$81 million) advanced to Minera Alumbrera Limited to fund operations that is subject to a fixed rate of 7.2% per annum (2005: 7.2% per annum). It has no fixed repayment date, but is not callable within 12 months. Other Loans Other loans include ZAR denominated loans at 31 December 2006 of US$135 million (2005 US$nil) payable to ARM Coal (refer to note 7). The loan is subject to a floating rate of interest based on a dividend calculation with no fixed repayment date and is not callable within 12 months. As at 31 December 2006, other loans included US$4 million (2005 US$1 million), received from the Ministry of Industry & Energy and Cantabria Government in Spain for San Juan de Nieva zinc smelter expansion projects. US$3 million (2005 US$1 million) is interest free, repayable by 2014 and US$1 million is subject to a fixed rate of 5.0% per annum, repayable by 2013. 218 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 29. Convertible Borrowings US$m 2006 2005 Convertible bonds Effect of fair value hedge Bond issue costs Convertible debenture 201 2 (2) 201 324 525 555 (9) (8) 538 320 858 Convertible Bonds On 15 August 2003, Xstrata Capital Corporation AVV issued US$600 million of Convertible Bonds due 15 August 2010 convertible at the option of the holder into fully paid Xstrata plc ordinary shares. The Convertible Bonds are guaranteed by the Company and were issued at par and bear a coupon of 3.95% per annum. On issue, they were convertible at any time after 26 September 2003 at the option of the holder into 61,180,977 ordinary shares in Xstrata plc based on a conversion price of GBP6.10 (US$9.81 converted into GBP at a fixed exchange rate) per ordinary share, a 39.6% premium to the closing price of Xstrata plc’s ordinary shares on August 1, 2003. On the giving of not less than 30 days notice, the Convertible Bond may be called by the Group at par plus accrued interest if the share price is 30% higher than the conversion price for 20 dealing days within a 30-day period, at any time on or after 6 September 2007. If 85% or more of the bonds originally issued have been converted and/or redeemed, then the remainder of the bonds can be redeemed by the Group. If not converted or previously redeemed, the Convertible Bonds will be redeemed at par on 15 August 2010. The liability component of the Convertible Bonds is carried at amortised cost based on an effective interest rate of 5.85% per annum. During 2006, 64.3% of the US$600 million of convertible bonds were converted by the holders (refer note 26). Following the conversions that occurred during 2006 and rights issue in October 2006 (refer to note 26), the remaining number of ordinary shares that can be issued under the bond at 31 December 2006 is 24,516,545 and as a result of the rights issue the conversion price was adjusted to GBP5.44 (US$8.75 converted into GBP at a fixed exchange rate). In February 2007, 22,832,325 ordinary shares were issued as a result of conversions by the holders of the Convertible Bonds (refer to note 38). On 15 March 2007, the Group announced that its subsidiary, Xstrata Capital Corporation AVV exercised its right to call for the redemption of all of the outstanding Convertible Bonds. The terms and conditions of the Bonds permit the Issuer to redeem all of the Bonds at their principal amount plus accrued and unpaid interest up to and including the date fixed for redemption, following the satisfaction of certain conditions. One of the conditions is that conversion rights have been exercised in respect of 85% or more in principal amount of the Convertible Bonds originally issued. As at 14 March 2007, US$14,730,000 or 2.455% of the principal amount of the Convertible Bonds originally issued was outstanding. The date fixed for redemption by the Xstrata Capital Corporation AVV is 16 April 2007. The last day on which conversion rights may be exercised by bondholders is 2 April 2007. The fixed interest rate on the bonds has been swapped to a floating rate (refer to note 28). The swap has been accounted for as a fair value hedge (refer to note 37). Convertible Debenture On 6 September 2005, Xstrata Capital Corporation AVV issued a US$375 million Convertible Debenture to Brookfield, due 14 August 2017, convertible at the option of the holder into fully paid Xstrata plc ordinary shares. The Convertible Debenture is guaranteed by the Company and was issued at par, with a coupon of 4.0% per annum. On issue it was convertible at any time on or after 14 August 2006 at the option of the holder into 12,100,332 ordinary shares in Xstrata plc based on a conversion price of GBP17.13 (US$30.99 converted into GBP at a fixed exchange rate) per ordinary share, representing a 35% premium to the closing price of Xstrata plc’s ordinary shares on 11 August 2005. Following the rights issue in October 2006 (refer to note 26), the total number of ordinary shares that can be converted was increased to 13,575,432 and the conversion price was adjusted to GBP15.27 (US$27.62 converted into GBP at a fixed exchange rate). On the giving of not less than 30 days’ notice, the Convertible Debenture may be called by the Group at par plus accrued interest, at any time after 14 August 2010. If not converted or previously redeemed, the Guaranteed Convertible Debenture will be redeemed at par on 14 August 2017. The liability component of the Convertible Bonds is carried at amortised cost based on an effective interest rate of 5.74% per annum. There were no conversions during 2006. Xstrata plc Annual Report 2006 | 219 30. Derivative Financial Liabilities US$m 2006 2005 Current: Commodity cash flow hedges Foreign currency cash flow hedges Other commodity derivatives Other foreign currency derivatives Non-current: Commodity cash flow hedges Foreign currency cash flow hedges Fair value interest rate swap hedge Other commodity derivatives Other foreign currency derivatives Total 54 1 6 17 78 50 1 24 1 96 172 250 101 14 118 – 233 51 – 10 – – 61 294 220 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 31. Provisions Share-based Employee compensation entitlements plans Post retirement medical Rehabilitation plans costs US$ m Onerous contracts Other 2006 At 1 January Acquisition of subsidiaries Arising during the year Discount unwinding PPE asset adjustment Utilised Unused amounts reversed Translation adjustments At 31 December Current Non-current 174 100 138 – – (74) (8) 22 352 193 159 352 12 – 49 – – (3) – – 58 – 58 58 11 407 20 – – (4) – (21) 413 – 413 413 Post retirement medical plans 318 656 28 32 88 (49) (12) 19 1,080 4 1,076 1,080 23 16 – 2 – (2) – 3 42 – 42 42 33 146 121 6 – (67) (5) – 234 92 142 234 571 1,325 356 40 88 (199) (25) 23 2,179 289 1,890 2,179 US$ m Employee entitlements Share-based compensation plans Rehabilitation costs Onerous contracts Other 2005 At 1 January Arising during the year Discount unwinding PPE asset adjustment Utilised Unused amounts reversed Translation adjustments At 31 December Current Non-current 154 96 – – (63) (2) (11) 174 80 94 174 9 11 – – (8) – – 12 – 12 12 13 – – – – (1) (1) 11 – 11 11 339 26 14 5 (38) (1) (27) 318 4 314 318 27 24 – – (25) – (3) 23 1 22 23 33 72 – – (70) (1) (1) 33 29 4 33 575 229 14 5 (204) (5) (43) 571 114 457 571 Xstrata plc Annual Report 2006 | 221 31. Provisions (continued) Employee entitlements The employee entitlement provisions mainly represent the value of excess leave entitlements allocated over the leave taken by the employees of the Group. These amounts are expected to be utilised as the employees either take their accrued leave or receive equivalent benefits upon ceasing employment. Current employee entitlements include excess short term leave entitlements and the portion of non-current employee entitlements that are expected to be incurred within 12 months. Non-current entitlements include long service leave entitlements which are payable upon an employee attaining a certain period of service and workers compensation provisions. For some entitlements, amounts will also be recovered from an independent fund (refer to note 19). These costs are expected to be incurred over the next 9 years (2005: 8 years). Share-based compensation plans The Group has various share-based compensation plans under which options to subscribe for the Company’s shares have been granted to certain executives and senior employees that will be cash-settled (refer to note 35). The intrinsic value of the options that had vested at 31 December 2006 was US$17 million (2005 US$1 million). Post retirement medical plans The Group operates unfunded post-retirement medical benefits plans in Canada, Dominican Republic, United States and South Africa for a number of current and former employees. Independent qualified actuaries using the projected unit credit method assess the accumulated benefit obligation and annual cost of accrued benefits. These costs are expected to be incurred over the next 13 years (2005: 18 years) (refer to note 35). Rehabilitation costs Rehabilitation provision represents the estimated costs required to provide adequate restoration and rehabilitation upon the completion of mining activities. These amounts will reverse when such rehabilitation has been performed. These costs are expected to be incurred over the next 24 years (2005: 16 years) (refer to note 24). Onerous contracts Onerous contract provisions represent the restatement of various long term contracts to their current market value at the acquisition date of subsidiaries. These contracts will expire within 12 years (2005: 13 years). Other Other includes provisions for litigation of US$83 million (2005 US$18 million) and restructuring of US$32 million (2005 US$nil) that are expected to be utilised within 17 years (2005: 2 years). 32. Other Liabilities US$m 2006 2005 Current: Deferred income 41 41 11 11 Non-current: Deferred income Other 16 – 16 9 1 10 222 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 33. Litigation settlements On 1 December 2006, the Group agreed to purchase the remaining 50% interest in the Tavistock TESA joint venture in South Africa from its joint venture partner, Total Coal South Africa (Pty) Ltd (TCSA) for US$49 million (refer to note 7) and confirmed the settlement of the long-term arrangements of TCSA’s 50% interest in Arthur Taylor Colliery (ATC) and Arthur Taylor Colliery Open-cast Mine (ATCOM) operations. The settlement follows the termination of a joint venture between the Group and TCSA in 2004. 34. Commitments and Contingencies Operating lease commitments – Group as Lessee The Group has entered into leases for buildings, motor vehicles and sundry plant and equipment. These leases have an average life of 5 years (2005: 12 years) with renewal terms at the option of the lessee at lease payments based on market prices at the time of renewal. There are no restrictions placed upon the lessee by entering into these leases. Future minimum lease payments under non-cancellable operating leases as at 31 December are as follows: US$m 2006 2005 Within one year After one year but not more than five years More than five years 50 101 20 171 17 23 11 51 Finance lease and hire purchase commitments The Group has entered into finance leases and hire purchase contracts for various items of plant and machinery. The majority of these leases include a residual balloon payment at the end of the lease term and title passing to the Group. Future minimum lease payments under finance leases and hire purchase contracts together with the future finance charges as at 31 December are as follows: Un-discounted minimum payments 2006 Present value of minimum payments 2006 Un-discounted minimum payments 2005 Present value of minimum payments 2005 US$m Within one year After one year but not more than five years More than five years Total minimum lease payments Less amounts representing finance lease charges Present value of minimum lease payments 159 84 43 286 (44) 242 147 68 27 242 – 242 31 188 48 267 (38) 229 15 172 42 229 – 229 Xstrata plc Annual Report 2006 | 223 34. Commitments and Contingencies (continued) Capital commitments Amounts contracted for but not provided in the financial statements amounted to US$795 million (2005 US$489 million), including: – – – Xstrata Coal US$62 million for a coal handling preparation plant upgrade at Mt Owen and US$58 million of earth moving equipment at Cerrejón; Xstrata Alloys US$17 million (2005 US$99 million) for Project Lion, US$32 million (2005 US$96 million) for the Mototolo joint venture and the construction of a ferrochrome smelter, US$nil (2005 US$29 million) for a mega pelletizer at the Wonderkop plant; and Xstrata Nickel US$104 million (2005 US$nil) for the Nickel Rim South project, US$159 million (2005 US$nil) for the Koniambo project and US$47 million (2005 US$nil) for the Kabanga project. The balance of the other amounts contracted for but not provided relates to various minor commitments around the Group, mainly for the purchase of new property, plant and equipment. Included in the above is US$371 million (2005 US$140 million) representing the Group’s share of the capital commitments that have been incurred jointly with other venturers. Finance leases entered into after 31 December 2006 amounted to US$nil (2005 US$nil). Guarantees Xstrata Coal Australia has contracted US$697 million (2005 US$440 million) for rail take or pay commitments, US$494 million (2005 US$243 million) for port take or pay commitments, performance guarantees to customers under contracts for supply of coal for US$25 million (2005 US$21 million) and guarantees to the NSW and Queensland Departments for Mineral Resources in respect of various mining leases and the performance thereof US$78 million (2005 US$59 million). Xstrata Coal as a party to the Newlands and Collinsville joint ventures is responsible for costs incurred with workforce termination and equipment demobilisation at the conclusion of the open cut mining contracts. Indemnities have been provided by the joint venture partners to government agencies including guarantees relating to mining tenements of US$34 million (2005 US$5 million). Xstrata Coal South Africa has issued guarantees to the Department of Mineral and Energy to obtain certain prospecting permits of US$68 million (2005 US$nil). Xstrata Coal’s share of the Cerrejón coal mine’s performance guarantees totals US$343 million (2005 US$nil). These guarantees have been provided to various government agencies to enable the coal mine to freely export coal, receive tax exemptions, and to access a special imports system. Xstrata Alloys has issued guarantees to Eskom for power usage and early termination of power usage of US$13 million (2005 US$16 million) and to the Department of Mineral and Energy Mineral Resources, municipalities and governmental boards in respect of various mining leases and the performance thereof for US$19 million (2005 US$6 million). Xstrata Alloys has issued a guarantee in respect of the obligations of Merafe under a US$43 million (2005 US$47 million) facility in connection with the acquisition of certain assets and resources relating to the PSV and the Project Lion ferrochrome expansion project to be undertaken by the PSV. Any payments to be made under the guarantee are secured by the Group’s ability to acquire Merafe’s PSV assets for fair value and the security Merafe has provided to the lender. Xstrata Copper, Xstrata Zinc and Xstrata Technology Australia have issued performance guarantees to customers for US$27 million (2005 US$22 million) and guarantees to the Queensland Departments for Mineral Resources and other government agencies in respect of various mining leases and the performance thereof, environmental bonds and self insurance licences US$174 million (2005 US$126 million). Xstrata Nickel has issued guarantees for energy contracts of US$96 million (2005 US$nil), US$25 million (2005 US$nil) for oil supplies and a letter of credit to Japanese Custom and Tariff Bureau in respect of customs duty and consumption tax on imports of nickel, cobalt and other raw materials for $3 million. 224 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 34. Commitments and Contingencies (continued) Xstrata Zinc has issued performance guarantees to the Northern Territory government for an electricity supply and pipeline agreements of US$29 million (2005 US$32 million) and has provided bank guarantees to the Northern Territory government for rehabilitation costs of US$41 million (2005 US$nil). Xstrata Zinc has issued bank guarantees in Spain of US$55 million (2005 US$76 million). A letter of credit of US$172 million (2005 US$nil) has been given for the pension liabilities of the Group’s Canadian operations. Letters of credit have been issued to the Canadian government for rehabilitation costs of US$33 million (2005 US$nil). A letter of credit has been issued to non-government Canadian electricity suppliers for power usage for US$10 million (2005 US$nil). Included in the above is US$1,609 million (2005 US$712 million) representing the Group’s share of guarantees that have been incurred jointly with other venturers. Other contingencies The purchase agreement of the Las Bambas copper project in Peru includes contingent amounts payable to a community trust fund of US$2 million (2005 US$21 million) following a decision to develop the project. This will be payable over the development and construction phases of the project. No decision to development the project has been made. There have been no other contingencies included above incurred jointly with other venturers. 35. Employee Benefits Share-based Payments The expense recognised for share based payments during the year is shown in the following table: US$m 2006 2005 Expense arising from equity settled transactions Expense arising from cash settled transactions Total Expense arising from share-based payment transactions 42 49 91 20 11 31 The Group operates a number of share option plans which are outlined below. There have been no cancellations or modifications to any of the plans during 2006 or 2005. Xstrata plc Long Term Incentive Plan (LTIP) The LTIP has two elements: (i) A contingent award of free ordinary shares that vests after three years, subject to, and to the extent that, performance criteria determined at the time of grant have been satisfied; and (ii) A share option to acquire ordinary shares at a specified exercise price after the third anniversary of grant, subject to, and to the extent that, performance criteria determined at the time of grant have been satisfied. All LTIP awards that vest are subject to the satisfaction of certain performance criteria being met over a three-year performance period. Half of the options and free share awards issued in 2004 and 2005 and one-third issued in 2006 are conditional on Total Shareholder Return (TSR) relative to a peer group, with the remainder conditional on the Group’s real cost savings relative to targets set on a stretching scale over the three-year period. The 2003 LTIP awards are only subject to the TSR performance criteria. For the awards conditional on TSR, one-half of the combined award will vest if TSR growth is at the median of the specified peer group, the full combined award will vest for performance at or above the second decile with straight line vesting between these points. No vesting will occur for below median performance. For the remaining award, vesting is conditional on the Group’s real cost savings relative to targets set on a stretching scale: 10% of the combined award will vest for 1% cost savings, 70% for 2% cost savings and all awards for 3% or more cost savings, with straight line vesting between these points. No vesting will occur if cost savings are less than 1%. Real cost savings will be measured in relation to operating costs after adjusting for the effects of inflation, excluding depreciation, commodity price linked costs, effects of currencies on translation of local currency costs and planned life of mine adjustments. No other features of the LTIP awards were incorporated into the measurement of fair value. Xstrata plc Annual Report 2006 | 225 35. Employee Benefits (continued) No consideration will be payable on the vesting of an LTIP award of free ordinary shares. On exercise of an option, a participant will be required to pay an exercise price which will not be less than the market value of an ordinary share on the date of grant. Of the below options, 1.9 million (2005: 1.6 million) are accounted for as cash-settled share-based awards whilst the remainder of the LTIP awards are equity-settled. The movement in the number of free ordinary shares and share options is as follows: Free Shares 2006 No 2006 WAEP 2005 No 2005 WAEP Outstanding as at 1 January Granted during the year Granted through rights issue Forfeited during the year Exercised during the year Expired during the year Outstanding as at 31 December Exercisable at 31 December 1 All 2 3 4 3,675,6671 852,536 436,8382 (121,974) (675,586)3 (38,116) 4,129,365 – NA NA NA NA NA NA NA NA 2,462,3621 1,325,723 – (26,901) (78,676)4 (6,841) 3,675,667 – NA NA NA NA NA NA NA NA shares included in this balance have been recognised in accordance with IFRS 2 Share-based Payments. These awards were issued as a result of the rights issue in October 2006 (refer to note 26) The weighted average share price at the date of exercise of these awards was GBP17.56 The weighted average share price at the date of exercise of these awards was GBP9.97 The weighted average remaining contractual life for the free shares outstanding as at 31 December 2006 is 8.0 years (2005: 8.4 years). The weighted average fair value of free shares granted during the year was US$22.25 (2005: US$14.76). Share Options 2006 No 2006 WAEP 2005 No 2005 WAEP Outstanding as at 1 January Granted during the year Granted through rights issue Forfeited during the year Exercised during the year Expired during the year Outstanding as at 31 December Exercisable at 31 December 1 2 3 4 5 12,191,1181 2,812,204 1,531,0632 (406,582) (1,559,147)3 (117,926) 14,450,7305 637,630 GBP7.82 GBP16.15 GBP9.25 GBP9.99 GBP3.57 GBP3.53 GBP9.26 GBP3.22 8,442,932 4,419,089 – (91,221) (524,792)4 (54,890) 12,191,118 106,444 GBP6.27 GBP10.60 – GBP7.94 GBP6.25 GBP7.94 GBP7.82 GBP6.27 All share options included in this balance have been recognised in accordance with IFRS 2 Share-based Payments, except for 106,444 options issued in 2002 These awards were issued as a result of the rights issue in October 2006 (refer to note 26) The weighted average share price at the date of exercise of these options was GBP17.75 The weighted average share price at the date of exercise of these options was GBP11.49 All the share options included in this balance have been recognised in accordance with IFRS 2 Share-based Payments, except for 81,013 options issued in 2002 The weighted average remaining contractual life for the share options outstanding as at 31 December 2006 7.9 years (2005: 8.4 years). The weighted average fair value of options granted during the year was US$7.72 (2005: US$5.31). The range of exercise prices for options outstanding at the end of the year was GBP3.22 – GBP15.37 (2005: GBP3.60 – GBP10.60). These exercise prices were adjusted by a factor of 0.9 due to the rights issue in October 2006. 226 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 35. Employee Benefits (continued) The following table lists the inputs to the models used to measure the fair value of equity settled awards granted: Date of grant 2006 Date of grant 2005 Dividend yield (%) Expected volatility (%) Risk-free interest rate (%) Earliest exercise date Latest exercise date Expected exercise date Share price at date of grant (GBP) Exercise price (GBP) Free share fair value at date of grant (GBP) Option fair value at date of grant (GBP) 1.3 31 4.4 10 Mar 2009 9 Mar 2016 17 Nov 2009 17.03 17.17 16.38 4.49 3.14 31 4.9 11 Mar 2008 10 Mar 2015 10 Sep 2011 10.48 10.60 9.54 3.05 The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historic volatility is indicative of future trends, which may also not necessarily be the actual outcome. Both the free shares and the equity settled options are equity settled plans and the fair value is measured at the date of grant. The fair value of the cash settled options is measured at the date of grant and at each reporting date until the liability is settled, using the Black Scholes option pricing model, taking into account the terms and conditions of the award. Xstrata AG incentive plan With the merger of Xstrata AG into Xstrata plc, Xstrata plc assumed the obligations of Xstrata AG under the scheme with the number of options and exercise price adjusted accordingly. The share options have a two year vesting period followed by a three year exercise period. The exercise price was the share price at the date of granting of the share options. There are no other conditions attaching to these options and they can be cash-settled by the holder. No further options will be granted under this incentive plan. All of the options below are accounted for as cash-settled share-based awards. The movement in the number of share options are as follows: 2006 No 2006 WAEP 2005 No 2005 WAEP Outstanding as at 1 January Granted through rights issue Exercised during the year Expired during the year Outstanding as at 31 December Exercisable at 31 December 1 2 3 4 173,3311 1,5022 (147,846)3 (12,667) 14,320 14,320 CHF27.63 CHF13.41 CHF25.64 CHF25.64 CHF13.41 CHF13.41 1,873,730 – (1,010,112)4 (690,287) 173,331 173,331 CHF21.40 – CHF19.73 CHF22.28 CHF27.63 CHF27.63 There are no shares included in this balance that have not been recognised in accordance with IFRS 2 Share-based Payments. These awards were issued as a result of the rights issue in October 2006 (refer to note 26) The weighted average share price at the date of exercise of these options was CHF35.89. The weighted average share price at the date of exercise of these options was CHF26.99. The weighted average remaining contractual life for the share options outstanding as at 31 December 2006 is 0.1 years (2005: 0.2 years). No new shares were granted during the year. The exercise price for options outstanding at the end of the year is CHF 13.41 (2005 range: CHF14.98 – CHF28.64). These exercise prices were adjusted by a factor of 0.9 due to the rights issue in October 2006. Xstrata plc Annual Report 2006 | 227 35. Employee Benefits (continued) Directors’ Service contracts Options were granted to two executive Directors’ pursuant to the terms of on which they were recruited. The options are to be equity-settled. The exercise price was the share price at the date of granting of the share options. The final scheme vests in January 2007 and each scheme has an exercise period of seven years. If the holder ceases to be employed by the Group for any reason, they may exercise any vested options within six months of such cessation, after which the options lapse. Any unvested options will lapse if the holder is dismissed lawfully under the terms of their contract or if they voluntarily resign except where they have a valid reason to terminate their employment as defined in their employment contract, in which case all unvested options shall immediately vest and become exercisable for a period of six months. In all other cases, they will remain exercisable for a period of six months. The movement in the number of share options are as follows: 2006 No 2006 WAEP 2005 No 2005 WAEP Outstanding as at 1 January Granted through rights issue Exercised during the year Outstanding as at 31 December Exercisable at 31 December 1 2 3 1,334,580 156,4131 (248,501)2 1,242,492 993,994 GBP4.75 GBP3.69 GBP3.69 GBP4.36 US$4.03 1,779,440 – (444,860)3 1,334,580 444,860 CHF12.53 and GBP4.75 – CHF12.53 GBP4.75 GBP4.29 These awards were issued as a result of the rights issue in October 2006 (refer to note 26) The weighted average share price at the date of exercise of these options was US$48.32 The weighted average share price at the date of exercise of these options was CHF23.45 The above share options have not been accounted for in accordance with IFRS 2 Share-based Payments as the options were granted on or before 7 November 2002 and have not been subsequently modified. The weighted average remaining contractual life for the share options outstanding as at 31 December 2006 is 6.4 years (2005: 7.4 years). No new shares were granted during the year. The range of exercise prices for options outstanding at the end of the year was £3.84 - £5.68 (2005: £4.12 - £6.35 and CHF 12.53). These exercise prices were adjusted by a factor of 0.9 due to the rights issue in October 2006. Xstrata AG Directors’ Incentive Scheme With the merger of Xstrata AG into Xstrata plc, Xstrata plc assumed the obligations of Xstrata AG under the scheme with the number of options and exercise price adjusted accordingly. The share options have a two year vesting period followed by a three year exercise period. The exercise price was the share price at the date of granting of the share options. There are no other conditions attaching to these options and they can be cash-settled by the holder. All of the options below are accounted for as cash-settled share-based awards. No further options will be granted under this incentive plan. The movement in the number of share options are as follows: 2006 No 2006 WAEP 2005 No 2005 WAEP Outstanding as at 1 January Expired during the year Outstanding as at 31 December Exercisable at 31 December 15,231 (15,231) – – CHF28.64 CHF28.64 – – 91,310 (76,079) 15,231 15,231 CHF23.34 CHF22.28 CHF28.64 CHF28.64 The weighted average remaining contractual life for the share options outstanding as at 31 December 2005 was 0.1 years. The range of exercise prices for options outstanding at the end of the 2005 was CHF28.64 – CHF28.64. No new shares were granted during the year, and there are no outstanding shares under this scheme at 31 December 2006. 228 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 35. Employee Benefits (continued) Deferred Bonus As detailed within the Remuneration Report on pages 126 to 139, the maximum bonus payable under the Bonus Plan for Executive Directors and the members of the Executive Committee is 300% of salary. Bonuses are payable in three tranches as follows: – – – the maximum bonus, which any one participant is eligible to receive in cash, will be limited to 100% of the individual’s base salary; any additional bonus up to a further 100% of base salary will be deferred for a period of one year; and any remaining bonus will be deferred for a period of two years. The deferred elements will take the form of awards of Xstrata shares conditional on the participant remaining in employment throughout the deferral period. The number of shares awarded will be determined by reference to the market value of the shares at the date the bonus payment is determined. The deferred elements have been treated as an equity-settled share-based payment in accordance with IFRS 2. In 2005 the Xstrata Remuneration Committee resolved that during the bonus deferral period dividend equivalents would accrue in relation to the deferral, to be delivered at the end of the deferral period and subject to the deferral award vesting. As dividend equivalents are receivable on the deferred amounts, the fair value of the deferral is technically equal to the value of the bonuses deferred. The total value of 2006 bonuses deferred was US$13 million (2005 US$7 million). The number of deferred shares for the 2006 deferred bonus is 291,585 (2005: 258,242). Directors’ Added Value Plan (AVP) The first cycle of the AVP began on 9 May 2005, and the second began on 10 March 2006. A description of the performance requirements and the vesting schedule of the plan are detailed within the Remuneration Report on pages 126 to 139. The fair value of the 2005 equity-settled share-based payment under IFRS 2 was US$7 million, estimated at the 9 May 2005, using a Monte Carlo simulation model to incorporate the market based features of the plan. The equivalent valuation of the 2006 award was US$7 million, estimated at 10 March 2006 using a Monte Carlo simulation model. For the 2005 plan cycle, the market capitalisation on the 9 May 2005 was US$11.4 billion, the Participation Percentage was equal to 0.5% and the share price at the measurement date was US$18.00. For the 2006 plan cycle, the market capitalisation on the 10 March 2006 was US$18.6 billion, the Participation Percentage was equal to 0.3% and the share price at the measurement date was US$29.39. 2006 Xstrata plc Xstrata share Indices1 Xstrata plc 2005 Xstrata share Indices1 Dividend yield (%) Expected volatility (%) Risk-free interest rate (%) Third anniversary of start of cycle Fourth anniversary of start of cycle Fifth anniversary of start of cycle 1 N/A 30% 4.45% 10 March 2009 10 March 2010 10 March 2011 N/A2 21% 4.45% 10 March 2009 10 March 2010 10 March 2011 N/A 32% 4.51% 9 May 2008 9 May 2009 9 May 2010 N/A2 21% 4.51% 9 May 2008 9 May 2009 9 May 2010 There are two Xstrata Share Indices used within the valuation model; one is a market capitalisation weighted TSR index comprising 19 global mining firms who are considered to be Xstrata’s key competitors for both financial and human capital. The other is a market capitalisation price index comprising the same 19 constituents. 2 When simulating the Xstrata Price Index, a dividend yield is included to account for the suppressing impact that a dividend payment has on the constituent share prices. A yield of 3.00% has been used. For the simulation of Xstrata's TSR and the Index TSR a dividend yield is not required. The expected volatility reflects the assumption that the historic volatility is indicative of future trends, which may also not necessarily be the actual outcome. There is no disclosure of the number of equity instruments granted as the AVP is not an award over a fixed number of shares. Xstrata plc Annual Report 2006 | 229 35. Employee Benefits (continued) Directors’ Glencore Option As part of a package to attract him to take the position of chief executive of Xstrata AG in October 2001, Glencore International AG (Glencore) awarded Mick Davis an option over shares in Xstrata owned by Glencore, at an exercise price 46% higher than the share price on the day he joined and exercisable after three years from 19 September 2005 until 19 September 2011. Following the creation of the Company, the merger with Xstrata AG and the rights issue in 2003 associated with the acquisition of MIM Holdings Limited, the option was over 1,334,669 shares in the Company, owned by Glencore, at an exercise price of CHF13.60 per share. On 20 September 2005, these options were exercised and Mick Davis received from Glencore a cash consideration equating to the current value of the option (CHF26 million, representing 1.334 million shares at CHF19.70 per share, being the difference between Xstrata plc's closing price of CHF33.30 per share on Monday 19 September 2005 and the exercise price of CHF13.60 per share). The Group did not incur any costs in respect of this exercise. Pensions and Other Post-employment Benefit Plans Net expense recognised in the income statement for the year ended 31 December: US$m 2006 2005 Defined benefit pension plans Defined contribution pension plans Post-retirement medical plans 14 81 17 112 3 78 – 81 Defined Contribution Pension Plans The Group participates in a number of defined contribution pension plans and industry-wide schemes covering the majority of its employees. The assets are held separately from those of the Group, being generally invested with insurance companies and regulated by local legislation. Post-retirement Medical Plans The Group participates in a number of post-retirement medical benefits. All material post-retirement medical benefit liabilities are in either North America or South Africa. Independent qualified actuaries using the projected unit credit method assess the accumulated benefit obligation and annual cost of accrued benefits. The actuaries have updated the valuations to 31 December 2006. Defined Benefit Pension Plans The Group contributes to defined benefit pension plans for a number of its employees. Independent professionally qualified actuaries assess the pension costs and funding of these plans using the projected unit method. The actuaries have updated the valuations to 31 December 2006. All material pension assets and liabilities in 2006 are in either North America or the United Kingdom. All assumptions in both jurisdictions are similar and as a result no further breakdown has been provided in this note. The 2005 amounts were principally in the United Kingdom. 230 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 35. Employee Benefits (continued) The following tables summarises the components of the net expense recognised in cost of sales in the income statement and the funded status and amounts recognised in the balance sheet for the defined benefit pension plans and post-retirement medical plans. The weighted average principal economic assumptions used to determine the actuarial values are as follows: PostPension retirement plans medical plans 2006 2006 Pension plans 2005 Postretirement medical plans 2005 Rate of salary increases Rate of pension increases Expected rate of return on plan assets: Equities Property Bonds Cash Total Discount rate Inflation rate Rate of medical cost increases * These percentages are the weighted average assumptions for the Group’s post-retirement medical plans. ** Assumptions in 2005 relate to South African plans. 3.8% 2.9% 9.0% – 4.6% – 6.9% 5.2% 2.9% – – – – – – – – 5.3%* 2.5%* 9.0%* 4.2% 2.7% 7.8% 7.0% 4.7% 3.5% 6.3% 4.8% 2.8% – – – – – – – – 8.9% ** 4.4%** 9.2%** The significant plans are based in North America where the assumptions were: Discount rate Inflation rate Rate of medical cost increases The remainder are in South Africa where the assumptions were: Discount rate Inflation rate Rate of medical cost increases 8.9% 4.3% 9.1% 5.3% 2.5% 9.0% A one percentage point change in the assumed rate of increase in healthcare costs would have the following impact: US$m Increase 2006 Decrease 2006 Increase 2005 Decrease 2005 Effect on the current service cost and interest cost Effect on the defined benefit obligation 2 40 (2) (39) – 1 – (1) The pension plan mortality rate used at 31 December 2006 and 31 December 2005 was PA92C06 less 0.25% pa for both pensioners and non-pensioners for the UK plans and UP-94 for North American pension and post-retirement medical plans. These rates refer to published projected mortality tables by actuarial bodies in the UK and North America and take into account the assumed increases in the life expectancy and are calculated for both current and future pensioners. There are no significant differences in these rates between schemes. The average life expectancy in the medical plans was 82 years as at 31 December 2006 (2005: 71 years). Xstrata plc Annual Report 2006 | 231 35. Employee Benefits (continued) Funded status (before allowance of deferred tax) at 31 December are as follows: PostPension retirement plans medical plans 2006 2006 Pension plans 2005 Postretirement medical plans 2005 US$m Present value of benefit obligations Assets at fair value Net liability Net liability as at 31 December represented by: Pension deficits Pension assets Net liability Historical adjustments are as follows: US$m 2,528 (2,393) 135 413 – 413 106 (85) 21 11 – 11 140 (5) 135 413 – 413 24 (3) 21 11 11 2006 2005 2004 Defined benefit obligation Plan assets Net deficit Experience gain adjustments on plan liabilities Experience (gain)/loss adjustments on plan assets 2,528 (2,393) 135 (4) (96) 106 (85) 21 (8) (4) 110 (85) 25 (1) 1 The reconciliation of the net liability movement during the year in the net pension and post-retirement medical plan liability (before allowance of deferred tax) are as follows: PostPension retirement plans medical plans 2006 2006 Pension plans 2005 Postretirement medical plans 2005 US$m Net liability as at 1 January Acquisition accounting adjustment* Total benefit expense Actuarial (gains)/losses Employer contributions Translation adjustments Net liability as at 31 December *Relates to adjustments made in respect of the acquisition of Falconbridge Limited in August 2006. 21 235 14 (74) (61) – 135 11 407 17 3 (4) (21) 413 25 – 3 – (5) (2) 21 13 – – (1) – (1) 11 Further contributions of GBP2 million per annum to 5 April 2015 are being made in order to eliminate the deficiency in the United Kingdom plan. Further contributions of US$76 million in 2007, US$33 million in 2008, US$30 million in 2009, US$25 million in 2010, US$2 million per annum from 2011 to 2014 and US$1 million per annum from 2015 to 2018 are being made in order to eliminate the deficiency in the North America plans. The total contributions to the defined benefit pension plans in 2007 including these further contributions are expected to be US$118 million. 232 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 35. Employee Benefits (continued) The components of benefit (income)/expense recognised in the income statement during the year are as follows: PostPension retirement plans medical plans 2006 2006 Pension plans 2005 Postretirement medical plans 2005 US$m Service cost Interest cost Expected return on plan assets (net of expected expenses) Gains/(losses) on settlements and curtailments 22 48 (56) – 14 5 9 (1) 4 17 2 6 (5) – 3 (1) 1 – – The components of actuarial (gains)/losses recognised in the Consolidated Statement of Recognised Income and Expenses during the year are as follows: PostPension retirement plans medical plans 2006 2006 Pension plans 2005 Postretirement medical plans 2005 US$m Expected return on plan assets (net of expected expenses) Actual return on plan assets Actual return less expected return on plan assets Actuarial gain on pension obligations Change of assumptions 56 (152) (96) (4) 26 (74) 1 (3) (2) – 5 3 5 (9) (4) (8) 12 – – – – (1) – (1) The cumulative amount of net actuarial gains recognised in the statement of recognised income and expenses is US$60 million (2005 loss US$11 million). Xstrata plc Annual Report 2006 | 233 35. Employee Benefits (continued) The reconciliation of the present value of benefit obligations and fair value of plan asset movements during the year are as follows: PostPension retirement plans medical plans 2006 2006 Pension plans 2005 Postretirement medical plans 2005 US$m Benefit obligation present value as at 1 January Acquisition accounting adjustment Current service cost Interest cost Employee contributions Actuarial (gains)/losses Actual benefit payments Settlements and curtailments Loss on settlements and curtailments Change of assumptions Translation adjustments Benefit obligation present value as at 31 December Plan assets fair value as at 1 January Acquisition accounting adjustment Actual return on plan assets Company contributions Employee contributions Benefits paid from fund Settlements and curtailments Translation adjustments Plan assets fair value as at 31 December Net liability as at 31 December Net liability as at 1 January 106 2,489 22 48 1 (4) (59) – – 26 (101) 2,528 85 2,254 152 61 1 (59) – (101) 2,393 135 21 11 439 5 9 – – (10) (28) 4 5 (22) 413 – 32 3 4 – (10) (28) (1) – 413 11 110 – 2 6 1 (8) (5) – – 12 (12) 106 85 – 9 5 1 (5) – (10) 85 21 25 13 – (1) 1 – (1) – – – – (1) 11 – – – – – – – – – 11 13 The defined benefit obligation present value included above for unfunded pension plans at 31 December 2006 was US$5 million (2005 US$5 million). The major categories of plan assets as a percentage of the fair value of total plan assets are as follows: Pension plans 2006 Pension plans 2005 Equities Property Bonds Cash Other Included in equities is US$1 million (2005 US$nil) of Xstrata plc shares. 52% –% 48% –% –% 53% 1% 40% 5% 1% The overall expected rate of return on assets is determined based on the market value weighted expected return applicable to the underlying asset category. 234 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 36. Related Parties Country of incorporation % of ordinary shares held & voting rights Name Principal activities Principal Subsidiaries Xstrata Coal Abelshore Pty Limited AZSA Holdings Pty Limited Cook Resources Mining Pty Limited Cumnock Coal Limited Enex Foydell Limited Enex Liddell Pty Limited Enex Oakbridge Pty Limited Xstrata Mt Owen Pty Limited Jonsha Pty Limited Oakbridge Pty Limited Oceanic Coal Australia Limited Ravensworth Operations Pty Limited Saxonvale Coal Pty Limited The Wallerawang Collieries Limited Ulan Coal Mines Limited Ulan Power Company Pty Limited Xstrata Coal Pty Limited Xstrata Coal Holdings Pty Limited Xstrata Coal Investments Australia Pty Limited Xstrata Coal Queensland Pty Limited Xstrata Energy Pty Limited Xstrata Newpac Pty Limited Xstrata Coal Canada Limited Xstrata Coal South America Limited Tironimus AG Tavistock Collieries (Pty) Ltd Xstrata Coal Marketing AG Xstrata Alloys Xstrata South Africa (Pty) Ltd Char Technology (Pty) Ltd African Fine Carbon (Pty) Limited African Carbon Producers (Pty) Limited Xstrata Copper Ernest Henry Mining Pty Ltd Minera Alumbrera Limited Mount Isa Mines Limited Xstrata South America Limited Xstrata Tintaya S.A. Compania Minera Xstrata Lomas Bayas Xstrata Chile Inversiones Limitada Xstrata Copper Chile S.A. Xstrata Commodities Middle East DMCC† Noranda Recycling Inc Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Canada Bermuda Switzerland South Africa Switzerland South Africa South Africa South Africa South Africa Australia Antigua Australia Cayman Peru Chile Chile Chile UAE USA Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Feasibility projects Holding company Holding company Holding company Coal operations Holding company Investment company Investment company Holding company Holding company Coal operations Marketing & trading Holding company, Coal, Chrome & Vanadium operations Char operation Char operation Char operation Copper operation Copper operation Copper, Lead and Zinc operations Holding company Holding company Copper operations Holding company Copper smelter Marketing Copper recycling 100% 100% 100% 84% 100% 100% 100% 100% 100% 78% 100% 100% 100% 95% 90% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 50%* 100% 100% 100% 100% 100% 100% 100% 100% Xstrata plc Annual Report 2006 | 235 36. Related Parties (continued) Country of incorporation % of ordinary shares held & voting rights Name Principal activities Principal Subsidiaries (continued) Xstrata Nickel Falconbridge International (Investments) Limited Falconbridge International Limited Falconbridge Dominicana C por A Falconbridge U.S. Inc. Falconbridge (Japan) Ltd. Falconbridge Europe S.A. Falconbridge Nikkelverk Aktieselskap Falconbridge International S.A. Falconbridge Brasil Ltda Xstrata Zinc Asturiana de Zinc SA Britannia Refined Metals Limited McArthur River Mining Pty Ltd Xstrata Zinc GmbH Xstrata Aluminium Noranda Aluminum, Inc. Xstrata Technology Xstrata Technology Pty Ltd MIM Process Technology South Africa (Pty) Ltd Other Xstrata (Schweiz) AG** Xstrata Capital Corporation AVV*** Xstrata Finance (Dubai) Limited† Xstrata Holdings Pty Ltd Xstrata Queensland Limited Falconbridge Limited Xstrata Finance (Canada) Limited Noranda Finance Inc. Xstrata Canada Inc Alberta Limited Bermuda Barbados Dom. Republic U.S.A. Japan Belgium Norway Belgium Brazil Spain UK Australia Germany USA Australia South Africa Switzerland Aruba UAE Australia Australia Canada Canada USA Canada Canada Holding company Nickel feeds acquisition Ferronickel operation Nickel marketing Nickel marketing Nickel marketing Nickel refinery Nickel procurement agent Exploration Zinc smelter Lead smelter Zinc operations Zinc smelter Aluminium operations Technology operations Technology operations Holding company Finance company Finance company Holding company Holding company Copper, nickel and Zinc operations Finance company Finance company Holding company Holding Company 100% 100% 85% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 236 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 36. Related Parties (continued) Principal place of operations/ country of incorporation Name Principal activities Effective interest held Principal Joint Ventures Xstrata Coal Bulga Joint Venture Douglas Tavistock Joint Venture Goedgevonden Joint Venture Foybrook Joint Venture Liddell Joint Venture Macquarie Coal Joint Venture Narama Joint Venture Newlands, Collinsville, Abbot Point Joint Venture Oaky Creek Coal Joint Venture Rolleston Pentland Wandoan Joint Venture Ulan Coal Mines Joint Venture United Joint Venture ARM Coal (Pty) Limited CMC Coal Marketing Company Ltd Carbones De Cerrejón LLC Cerrejón Zona Norte SA Xstrata Alloys Samancor Joint Venture Merafe Pooling and Sharing Venture Mototolo Joint Venture Xstrata Copper Antamina Joint Venture Collahuasi Joint Venture Xstrata Nickel Kabanga Joint Venture Koniambo Joint Venture Xstrata Zinc Lady Loretta Lennard Shelf Xstrata Aluminium Gramercy Alumina LLC St. Ann Bauxite Limited Principal Associates Xstrata Coal Newcastle Coal Shippers Pty Ltd Port Kembla Coal Terminal Limited Richards Bay Coal Terminal Company Ltd Xstrata Zinc Noranda Income Fund Australia South Africa South Africa Australia Australia Australia Australia Australia Australia Australia Australia Australia South Africa Ireland Anguilla Colombia South Africa South Africa South Africa Peru Chile Africa New Caledonia Australia Australia USA Jamaica Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Coal operations Marketing & trading Coal operations Coal operations Chrome operations Chrome operations Platinum operations Copper & Zinc operations Copper operations Nickel project Ferronickel project Zinc project Zinc project Aluminium refinery Bauxite operation 87.5% 16% 74% 67.5% 67.5% 80% 50% 55% 55% 75% 90% 95% 49% 33.33% 33.33% 33.33% 50% 79.5% 37% 33.75% 44% 50% 49% 75% 50% 50% 50% Australia Australia South Africa Canada Coal terminal Coal terminal Coal terminal Zinc refinery 37.1% 20.0% 20.9% 25% * This investment is treated as a subsidiary as the Group is entitled to 2 of the 4 Board positions of Minera Alumbrera Limited, including the Chairman as it is the manager of the copper operation. The Chairman has the casting vote where any vote is split equally between the 4 board positions however in a limited number situations the vote must be unanimous, including transactions with related parties. ** Directly held by the parent company. *** 40% held by the parent company. † 90% held by the parent company. The Group comprises a large number of companies and it is not practical to include all of these in the above list. All entities operate mainly in the country of incorporation and these interests are held indirectly by the parent company unless otherwise indicated. Xstrata plc Annual Report 2006 | 237 36. Related Parties (continued) During the year, the Group entered into the following transactions, in the ordinary course of business, with related parties: Treatment & refining charges Treatment & refining revenue Agency & marketing charges Interest & other revenue Amounts payable Amounts receivable US$m Sales** Purchases Glencore International AG* 2006 2005 Joint venture entities 2006 2005 Associates 2006 2005 3,703 2,248 940 348 258 155 8 64 63 71 – 1 37 62 317 212 – – 100 – – – – – – – 4 – 224 – 586 – 362 – – – 58 – – – 14 15 – – 1 2 166 – * Includes share of joint ventures ** No provision for doubtful debts has been raised in respect of transactions with related parties Included in the transactions with Glencore are US$651 million (2005 US$761 million) of back-to-back sales whereby the title to the goods has passed to Glencore but they are then on-sold to customers at the same sales price that the Group received. Amounts payable and receivable, are included in Trade and other receivables (refer to note 19) and in Trade and other payables (refer to note 27), are unsecured and will be settled in cash. Glencore International AG – Substantial shareholder On 29 May 2003 Glencore International AG (Glencore), Credit Suisse First Boston Equities Limited and Credit Suisse First Boston (Europe) Limited entered into a capital management programme. Under the terms of this agreement in connection with the Group’s acquisition of the MIM Group and the associated rights issue, Glencore, Credit Suisse First Boston Equities Limited and Credit Suisse First Boston (Europe) Limited had joint ownership over 253,699,767 ordinary shares representing 40.1% of the issued share capital of the Company at 31 December 2005. On 20 December 2006, the Capital Management Arrangement between Glencore and Credit Suisse Group was terminated. As at 31 December 2006, Glencore owned 35.7% of the issued share capital of the Company representing 336,801,333 ordinary shares. On 30 October 2006, 235,787,596 ordinary shares were issued under a rights issue which was structured as an issue of one new ordinary share at a price of GBP 12.65 per share for every three existing ordinary shares held. Glencore was paid an underwriting fee of US$35 million for the ordinary shares they subscribed to (refer to note 26). Chrome Xstrata Alloys entered into a ferrochrome marketing agreement with Glencore on 21 April 1995, appointing Glencore as its exclusive world-wide marketing agent for the sale of Xstrata Alloys entire production of ferrochrome other than ferrochrome sold into the US, Canada and certain Asian countries. The agreement continues for as long as Xstrata Alloys produces ferrochrome. Glencore is obliged to use its best endeavours to arrange sales at prevailing market rates subject to initial agreement and approval by Xstrata Alloys prior to effecting the sale. Glencore assists Xstrata Alloys in negotiating sales contracts with third parties. Glencore is entitled to receive an agency fee of 3.5% on FOB sales revenues and an additional fee of 0.75% on FOB sales revenues for assuming the risk of non-payment by customers on this material. Glencore assumes 60% of the risk of non-payment by customers in relation to ferrochrome sales. If at any time Xstrata Alloys notifies Glencore that it is able to find purchasers for its production at prices higher than those generally obtainable by Glencore, Xstrata Alloys may, unless Glencore is able to obtain similar prices, sell its products in the market. Glencore is nevertheless entitled to an agency fee of 3.5% of FOB sales revenue in respect of such sales. Glencore is also entitled to receive a US$50,000 monthly fee in connection with market analysis and certain administrative tasks it performs for Xstrata Alloys. 238 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 36. Related Parties (continued) Ferrochrome sold into the US and Canada is distributed by Glencore Ltd and Glencore Canada Inc respectively, under two distribution agreements. These agreements continue indefinitely, with both parties having the right to terminate the agreement at 12 month’s notice. The percentage of distribution fees payable by the Group in respect of ferrochrome sold under the distribution agreement is substantially the same as the commission paid in respect of ferrochrome sold under the marketing agreement. Mitsui & Co. Ltd is the appointed distributing agent for ferrochrome sales into China, Japan and South Korea up to a maximum of 105,000 tonnes per annum. A change in distributing agent for sales into these countries must be done with the consent of Glencore. Vanadium In December 1997, the Group, entered into a 20-year marketing agreement with Glencore in respect of Rhovan’s and Vantech’s (closed in 2004) entire production of vanadium other than vanadium sold into the US and Canada. Glencore is obliged to use its best endeavours to arrange sales of vanadium pentoxide and ferrovanadium to customers at prevailing market rates subject to initial agreement and approval by Xstrata Alloys prior to effecting the sale. Xstrata Alloys is obliged to pay to Glencore an agency fee of 3.5% on FOB sales revenues and an additional fee of 1.5% on FOB sales revenues for assuming the risk of non-payment by customers on this material. Glencore assumes 100% of the risk of non-payment by customers in relation to vanadium sales. If at any time Xstrata Alloys notifies Glencore that it is able to find purchasers for its production at prices higher than those generally obtainable by Glencore, Xstrata Alloys may, unless Glencore is able to obtain similar prices, sell its products in the market. Glencore is nevertheless entitled to the 3.5% agency fees described above in respect of such sales. Vanadium pentoxide and ferrovanadium sold into the US and Canada is distributed by Glencore Ltd and Glencore Canada Inc respectively, under two distribution agreements. The distribution agreements have the same term as the marketing agreement and consequently, the percentage of distribution fees payable by the Group in respect of vanadium pentoxide and ferrovanadium is substantially the same as the commission paid in respect of vanadium pentoxide and ferrovanadium sold under the marketing agreement. Coal In 2002, the Group entered into a 20-year market advisory agreement with Glencore with fee reviews at the end of every fifth year of the agreement. Pursuant to this agreement, Glencore acts as the Group’s market advisor with respect to its export production of coal (other than for Cumnock No. 1 Colliery Pty Limited while it is not a wholly owned subsidiary and Xstrata Coal’s share of production from the Cerrejón thermal coal operation in Colombia). The fee payable to Glencore is US$0.50 per attributable tonne of coal exported by the Group from Australia or South Africa. In January 1995, Cumnock entered into a sales and marketing agreement with Glencore, for a commission of US$0.75 per tonne for all coal sold by Cumnock. Pursuant to this agreement, Glencore provides sales and marketing services to Cumnock and Cumnock appoints Glencore as its agent to market coal. The Group entered into market standard forward commodity price derivatives with Glencore as counter-party. During the year ended 31 December 2006, 1,065,000 tonnes (2005: 945,000 tonnes) were delivered at an average FOB price of US$56.31 per tonne (2005 US$57.80 per tonne). At 31 December 2006, nil tonnes (2005: 765,000 tonnes) were contracted with Glencore for delivery. These derivatives are on arm’s length terms and conditions and are included within derivative financial assets and liabilities (refer to notes 23, 30 and 37). During the year ended 31 December 2006, 452,489 tonnes were borrowed from Glencore and 507,970 tonnes were transferred back to Glencore with 85,089 tonnes owed to Glencore at 31 December 2006 (31 December 2005: 140,570 tonnes) on arm’s length terms and conditions. In 2006 the Group entered into a 3-year fuel supply agreement with Glencore to supply diesel fuels to coal mines in New South Wales and Queensland. The supply agreement started in April 2006 and US$47 million were delivered to 31 December 2006. The supply agreement is on arm’s length terms and prices change monthly according to the world market price per barrel (US$/BBL). In 2005 Cerrejón entered into a 4-year fuel supply agreement with Glencore to supply diesel fuels. Since Xstrata acquired an interest in Cerrejón, Xstrata’s share of the fuel purchases totalled US$43 million to 31 December 2006. The supply agreement is on arms length terms and prices change for each shipment according to the world market price per barrel (US$/BBL). All coal purchases and sales with Glencore are on arm’s length terms and conditions. Xstrata plc Annual Report 2006 | 239 36. Related Parties (continued) On 20 April 2006, the Group acquired a 331⁄3% interest in the Cerrejón thermal coal operation in Colombia for a cash consideration of US$1,719 million from Glencore (refer to note 7). Zinc During 2006, Xstrata Zinc renewed a service agreement for a period of 2 years with Glencore (the Asturiana Service Agreement), under the terms of which Glencore provides advice and assistance with respect to the acquisition of mining and/or metallurgical interests and advice in connection with Asturiana’s hedging policy and improvement of its position in the zinc market. The fees to be paid by Asturiana under the Asturiana Service Agreement are US$2 million per annum. Xstrata Zinc entered into an ‘evergreen’ agreement with Glencore in 2004 to purchase 380,000 dmt (2005: 380,000 dmt) per annum of zinc concentrate. Treatment charges in respect of such purchases are negotiated annually on arm’s length terms and conditions. In 2006, Xstrata Zinc (San Juan de Nieva and Nordenham) agreed to supply Glencore with 220,000 tonnes (2005: 250,000 tonnes) of SHG zinc slabs or CGG ingots during 2006 based on market FOB/CPT prices plus the respective market premium. In 2006 Xstrata Zinc (McArthur River) supplied Glencore with 262,400 wmt of zinc concentrate and has an agreement to supply this amount each year until 31 December 2009, after which it will become ‘evergreen’ in nature. Treatment charges are negotiated annually on arm’s length terms and conditions. Xstrata Zinc (Mt Isa) has two agreements with Glencore for the supply of zinc concentrate from 2006 to 31 December 2008 after which they will become ‘evergreen’ in nature. The first agreement is to supply 90,000 wmt per annum. The second agreement is to supply 80,000 wmt to 100,000 wmt per annum for the purpose of swapping Mt Isa concentrate in exchange for the same volume to be delivered to Xstrata’s European smelters at equivalent terms. Treatment charges are negotiated annually on arm’s length terms and conditions. Xstrata Zinc Canada had an agreement to supply Glencore with 1,000 tonnes per month, during 2006 of SHG zinc slabs and Jumbos based on market delivery duty paid plus the respective market premium. All purchase and sales transactions with Glencore are on arm’s length terms and conditions. Copper Xstrata Copper has entered into sales agreements with Glencore in respect of the total available export allocation of copper cathode and surplus North Queensland copper concentrate not processed through its Mount Isa copper smelter for an initial 3-year period effective from 1 January 2004, and ‘evergreen’ thereafter unless the agreement is terminated by either party with a minimum 12 month notice period. The sales terms for the copper cathode are the LME price plus a range of premiums that is based on Codelco North Asian CIF Liner Terms less freight discounts by destination. The sales terms for the copper concentrate are based on market prices less agreed metal content deductions, treatment and refining charges. The treatment and refining charges for the benchmark portion (25%) are fixed annually in line with annual benchmark terms. The treatment and refining charges for the spot portion (75%) are negotiated quarterly based on the prevailing spot market terms. Xstrata Copper (Minera Alumbrera Limited) has entered into a frame contract with Glencore in respect of 20,000 to 40,000 dmt copper concentrate per annum expiring on 31 December 2004, thereafter ‘evergreen’ with a 12-month termination period. The sales terms for the copper concentrate are negotiated annually on arm’s length terms and conditions. Minera Alumbrera Limited also has a fixed term contract for the sale of copper concentrate to Glencore for 40,000 dmt per annum in 2004, 2006 and 2007 as well as 60,000 dmt in 2005, expiring 31 December 2007. The treatment charges are US$25 per tonne in 2004, US$30 per tonne in 2005, US$50 per tonne in 2006 and US$52 per tonne in 2007. The refining charges are US2.5 cents per pound in 2004, US3.0 cents per pound in 2005, US5.0 cents per pound in 2006 and US5.2 cents per pound in 2007. Minera Alumbrera Limited on occasions sells concentrate to Glencore at spot terms at prevailing spot market prices. Minera Alumbrera Limited on occasions also sells concentrate to Glencore under swap arrangements at prevailing market prices. All terms and conditions are set on an arm’s length basis. Copper cathode sales agreements were entered into between Xstrata Copper Canada and Glencore in the second half of 2006. All sales were at spot term according to the prevailing market conditions. Copper cathode and concentrate sales agreements were also entered into between Xstrata Commodities Middle East and Glencore in the second half of 2006. All sales were at spot terms according to the prevailing market conditions. 240 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 36. Related Parties (continued) Xstrata Copper (North Queensland) agreed to a copper concentrate purchase agreement with Glencore during 2006. The purchase was at spot terms in accordance with the prevailing market conditions. All sales transactions with Glencore are on arm’s length terms and conditions. Nickel In 2004 Xstrata Nickel entered into two agreements with Glencore for the treatment of approximately 2,000 tonnes per annum of white alloy raw material feed to the Nikkelverk refinery in Norway and the Sudbury smelter in Canada. The contracts include both a metal purchase and a metal return component. The term of the contracts is to the end of 2009, continuing indefinitely thereafter unless terminated by either party with six months’ notice given not earlier than 1 July 2009. Treatment and refining charges to Glencore are subject to price participation adjustments based on prevailing market prices. Xstrata Nickel sells refined nickel and cobalt to Glencore on arm’s length terms and conditions, under annual contracts or spot arrangements, which are based on prevailing market rates. Associates Coal Xstrata Coal has a number of investments in export coal terminals allowing it to export coal into overseas markets. Xstrata Coal South Africa holds a 20.9% (2005: 20.9%) interest in Richards Bay Coal Terminal Company Ltd (RBCT), a company that operates the coal terminal in Richards Bay, South Africa. RBCT is governed by a consolidated agreement between the seven shareholders which deals with all aspects of the operation of the terminal. All matters are decided by the board, membership of which is determined by shareholding. All decisions must have an 80% majority. Veto rights are held by BHP Billiton (Ingwe), Anglo American and Xstrata Coal. Xstrata Coal South Africa reimburses RBCT for its share of operating and capital expenditure. Xstrata Coal Australia has a 20% (2005: 20%) interest in Port Kembla Coal Terminal Limited and a 37.1% (2005: 37.1%) interest in Newcastle Coal Shippers Pty Limited. Xstrata Coal Australia reimburses these coal terminals for its share of coal loading and handling charges. Zinc The Group has an effective 25% economic and voting interest in the Noranda Income Fund (NIF), which owns a zinc refinery in Salaberry-de-Valleyfield, Quebec. The Group’s 's interest in the NIF are held as ordinary units of the partnership, which are subordinate to the priority units in respect of cash distributions in any month until May 3, 2017. In addition, the Group has entered into a supply and processing agreement that continues until May 2, 2017 and is obligated to sell to the NIF up to 550,000 tonnes of zinc concentrate per year. The NIF pays the Group a concentrate price, based on the price of zinc metal on the London Metal Exchange, for the payable zinc metal contained in the concentrate less a processing fee of US$31.31 per pound of such payable zinc metal at 31 December 2006. Joint Venture Entities Xstrata Coal has a 331⁄ 3% interest in the Cerrejón thermal coal operation in Colombia. Xstrata Copper has a 33.75% interest in the Antamina joint venture in Peru and a 44% interest in the Collahuasi joint venture in Chile. Xstrata Nickel has a 49% interest in the Koniambo ferronickel project in New Caledonia. The amounts receivable include amounts advanced for project funding. Remuneration of Key Management Personnel of the Group US$m 2006 2005 Wages and salaries Pension and other post-retirement benefit costs Share-based compensation plans 15 4 65 84 15 4 18 37 Includes amounts paid to Directors disclosed in the Remuneration report on pages 136 to 139. Xstrata plc Annual Report 2006 | 241 37. Financial Instruments The Group’s significant financial instruments, other than derivatives, comprise bank loans and overdrafts, convertible borrowings, capital market notes, finance leases and hire purchase contracts, and cash and short term deposits. The main purpose of these financial instruments is to raise finance for the Group’s acquisitions and operations. The Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The Group is exposed to changes in currency exchange rates, commodity prices and interest rates in the normal course of business. Derivative transactions are generally entered into solely to hedge these risks although hedge accounting under IAS 39 is only applied when certain criteria have been met. Market fluctuations in derivative financial instruments designated as hedges are used to offset the fluctuations in the underlying exposure. The Group generally does not hold derivatives for trading purposes. Refer below and to the Financial Review on pages 51 to 52 for further discussion on the Group’s strategies in respect of holding financial instruments. The main risks arising from the Group’s financial instruments are credit risk, interest rate risk, liquidity risk, foreign currency risk and commodity price risk. A treasury committee establishes the policies for managing each of these risks and the board reviews and agrees these policies. The Group’s accounting policies in relation to derivatives are set out in Note 6. Credit risk The Group is mainly exposed to credit risk in respect of trade receivables, however given the geographical industry spread of the Group’s customers, credit risk is believed to be limited. Where concentrations of credit risk exist, management closely monitors the receivable and ensures appropriate controls are in place to ensure recovery. Credit risk is minimal and not concentrated for other financial assets. Credit risk is limited to the carrying amount of financial assets at the balance sheet date. Details of guarantees given by the Group are outlined in note 34. Interest rate risk It is the Group’s preference to borrow and invest at floating rates of interest, notwithstanding that some borrowings are at fixed rates. A limited amount of fixed rate hedging can be undertaken during periods where the Group’s exposure to movements in short term interest rates is more significant. In keeping with the Group’s preference to borrow at floating rates of interest, the following interest rate swap contracts were outstanding at 31 December 2006: Principal amount 2006 Average rate % 2006 Fair value 2006 Principal amount 2005 Average rate % 2005 Fair value 2005 US$m Fair value hedges: Interest rate swap from US$ fixed rates: Maturing between 1 to 2 years* Maturing between 3 to 4 years** Maturing between 4 to 5 years* Maturing greater than 5 years* Interest rate swap to US$ fixed rates: Maturing between 1 to 2 years Maturing greater than 5 years 111 600 1,050 1,750 25 100 3,636 8.48 4.5 5.69 6.30 5.00 4.54 5.84 6 (11) (1) (12) – 2 (16) – – 600 – – – 600 – – 4.5 – – – 4.5 – – (10) – – – (10) * Relates to the Senior debentures (refer to note 28) ** Relates to the Convertible borrowings (refer to note 29) 242 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 37. Financial Instruments (continued) The interest rate risk profile of the Group as at 31 December 2006 was as follows: Falling due within 1 year Falling due between 1-2 years Falling due between 2-3 years Falling due between 3-4 years Falling due between 4-5 years Falling due more than 5 years US$m 2006 Fixed rate by balance sheet category: Cash and cash equivalents Other financial assets Capital market notes* Equity minority interest loans Convertible borrowings* Finance leases/hire purchase contracts Preference shares Other loans Fixed rate by currency: AUD CAD EUR GBP US$ Other 467 – (5) – – (147) – – 315 (95) – – 11 397 2 315 – 116 (320) – – (14) (134) – (352) (8) (289) – – (55) – (352) – – (14) – – (16) (67) – (97) (8) (67) – – (22) – (97) – – (14) – (201) (10) – – (225) (10) – – – (215) – (225) – – (391) – – (27) – – (418) (22) (5) – – (391) – (418) – – (3,388) (81) (324) (28) – (1) (3,822) (21) (7) (1) – (3,793) – (3,822) 467 116 (4,132) (81) (525) (242) (201) (1) (4,599) (164) (368) (1) 11 (4,079) 2 (4,599) Floating rate by balance sheet category: Cash and cash equivalents Other financial assets Capital market notes Syndicated bank loan Bank loans – other Bank overdrafts Preference shares Other loans Floating rate by currency: AUD CAD EUR GBP US$ ZAR Other 1,181 – – (1,677) (39) (143) – – (678) 57 (132) 13 1 (658) 32 9 (678) – – – – (64) – – – (64) – – – – (64) – – (64) – – (500) (3,353) (41) – – – (3,894) – – – – (3,893) (1) – (3,894) – – – – (41) – – – (41) – – – – (41) – – (41) – – – (4,063) (199) – – – (4,262) – – – – (4,262) – – (4,262) – 122 – – – – (103) (135) (116) – (103) – – 10 (23) – (116) 1,181 122 (500) (9,093) (384) (143) (103) (135) (9,055) 57 (235) 13 1 (8,908) 8 9 (9,055) Xstrata plc Annual Report 2006 | 243 37. Financial Instruments (continued) The interest rate risk profile of the Group as at 31 December 2005 was as follows: Falling due within 1 year Falling due between 1-2 years Falling due between 2-3 years Falling due between 3-4 years Falling due between 4-5 years Falling due more than 5 years US$m 2005 Fixed rate by balance sheet category: Cash and cash equivalents Capital market notes Convertible borrowings* Equity minority interest loans Finance leases/hire purchase contracts Fixed rate by currency: AUD GBP US$ ZAR 197 (14) – – (15) 168 174 9 (14) (1) 168 – (5) – – (138) (143) (132) – (8) (3) (143) – (166) – – (11) (177) (6) – (171) – (177) – (16) – – (13) (29) (7) – (22) – (29) – (12) (555) – (9) (576) (9) – (567) – (576) – (63) (320) (81) (43) (507) (24) – (483) – (507) 197 (276) (875) (81) (229) (1,264) (4) 9 (1,265) (4) (1,264) Floating rate by balance sheet category: Cash and cash equivalents Other financial assets Syndicated bank loan Term bank loan Bank loans – other Bank overdrafts Floating rate by currency: AUD EUR GBP US$ ZAR Other 324 31 (106) (600) (7) (3) (361) 59 10 1 (471) 37 3 (361) – – – – (1) – (1) – – – – (1) – (1) – – – – (2) – (2) – – – – (2) – (2) – – (971) – (2) – (973) – – – (972) (1) – (973) – – – – (1) – (1) – – – – (1) – (1) – – – – – – – – – – – – – – 324 31 (1,077) (600) (13) (3) (1,338) 59 10 1 (1,443) 32 3 (1,338) *The borrowings are subject to interest rate swaps The interest charged on floating rate financial liabilities is based on the relevant national inter-bank rates and re-priced at least annually. Interest on financial instruments classified as fixed rate is fixed until maturity of the instrument. The other financial instruments of the Group that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk. 244 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 37. Financial Instruments (continued) Borrowing facilities The Group has various borrowing facilities available to it. The un-drawn committed facilities available at 31 December 2006 in respect of which all conditions precedent had been met at that date are as follows: US$m 2006 2005 Expiring in: Less than 1 year Between 3 to 4 years 793 407 1,200 447 29 476 Foreign currency risk Owing to the Group’s significant operations in Australia, North America, South America, South Africa and Europe, the balance sheet and results can be affected significantly by movements in exchange rates. The long term relationship between commodity prices and the currencies of most of the countries where the Group operates provides a degree of natural protection however in the short term it can be quite volatile. The reporting currency of the Group is the US$, as this is the underlying economic currency of the Group’s cash flows and the majority of borrowings are denominated in US$. However overseas operations have cash flows in local currencies. Xstrata plc Annual Report 2006 | 245 37. Financial Instruments (continued) Foreign currency hedges The Australian operations have entered into AUD/US$ and CAD/US$ exchange contracts to hedge a portion of their US dollar denominated revenue and third party loans. The Group also enters into forward contracts to hedge specific one off foreign currency transactions. The open foreign currency exchange contracts as at 31 December 2006 are as follows: Classified as Cash flow hedges: Contract amount 2006 Average forward rate 2006 Fair value 2006 Contract amount 2005 Average forward rate 2005 Fair value 2005 US$m Forward contracts – sell US$/buy AUD: Maturing in less than 1 year Maturing between 1 to 2 years Forward contracts – sell US$/buy EUR: Maturing in less than 1 year Forward contracts – sell ZAR/buy EUR: Maturing in less than 1 year Forward contracts – sell AUD/buy GBP: Maturing in less than 1 year Forward contracts – sell US$/buy JPY: Maturing in less than 1 year Forward contracts – sell US$/buy CAD: Maturing in less than 1 year Forward contracts – sell CAD/buy US$: Maturing in less than 1 year 143 11 154 19 19 3 3 1 1 9 9 5 5 1 1 0.7550 0.7397 0.7539 1.3125 1.3125 7.9685 7.9685 0.3884 0.3884 108.3762 108.3762 1.5290 1.5290 1.5290 1.5290 6 1 7 – – – – – – (1) (1) 2 2 – – 8 661 9 670 1 1 1 1 5 5 – – – – – – 0.7468 0.7329 0.7466 1.2630 1.2630 7.8290 7.8290 0.3927 0.3927 – – – – – – (14) – (14) – – – – – – – – – – – – (14) An Australian subsidiary has designated its US$ denominated capital market notes as a fair value hedge of an investment in a US$ denominated South American operation (refer to notes 24 and 28). The hedge is being used to reduce exposure to foreign currency risk. 246 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 37. Financial Instruments (continued) Classified as other derivatives: Contract amount 2006 Average forward rate 2006 Fair value 2006 Contract amount 2005 Average forward rate 2005 Fair value 2005 US$m Forward contracts – sell US$/buy CAD: Maturing in less than 1 year Maturing between 1 to 2 years Forward contracts – sell CAD/buy US$: Maturing between 4 to 5 years 790 111 901 300 300 1.14 1.57 1.19 1.54 1.54 (17) 40 23 (88) (88) (65) – – – – – – – – – – – – – – – – – – Commodity price risk The Group is exposed to fluctuations in commodity prices, with the commodity mix spread fairly evenly between those which are priced by reference to prevailing market prices on terminal markets and those that are set on a contract basis with customers, generally on an annual basis. Due to the volatile nature of commodity prices and the historical relationship between prices and the currencies of most of the countries where the Group operates, hedging may be entered into only in limited circumstances and subject to strict limits laid down by the Board. Where exposure to commodity price movements results from processing contracts for which the Group has no underlying production, market risk from fluctuations on the commodity price will from time to time be hedged by LME futures or the OTC swap market. Xstrata plc Annual Report 2006 | 247 37. Financial Instruments (continued) Commodity hedging The Australian and Americas operations have gold forwards and collars to hedge prices of future sales. The Australian and South African operations have entered into coal forwards to hedge prices of future sales of coal. The open forwards and collars commodity contracts as at 31 December 2006 are as follows: Classified as Cash flow hedges: Average price US$ 2006 Fair value US$m 2006 Average price US$ 2005 Fair value US$m 2005 Ounces 2006 Ounces 2005 Cash flow hedges: Gold forwards – AUD denominated contracts: Maturing in less than 1 year Maturing between 1 to 2 years Maturing between 2 to 3 years Maturing between 3 to 4 years Gold forwards – US$ denominated contracts: Maturing in less than 1 year Maturing between 1 to 2 years Gold options – US$ denominated contracts: Maturing in less than 1 year Maturing between 1 to 2 years Maturing between 2 to 3 years Maturing between 3 to 4 years Silver forwards – US$ denominated contracts: Maturing in less than 1 year 74,250 84,200 87,800 – 246,250 104,166 – 104,166 93,500 126,000 150,000 – 369,500 – – 563.16 579.62 589.44 – 578.16 386.30 – 386.30 500-595 475-595 495-640 – 475-640 – – (7) (9) (12) – (28) (27) – (27) (7) (13) (15) – (35) – – 58,843 88,500 84,200 87,800 319,343 102,668 125,000 227,668 51,000 102,000 126,000 150,000 429,000 4,900,000 4,900,000 500.40 520.05 538.63 547.76 528.95 373.06 386.30 380.33 500-590 500-575 475-595 495-640 475-640 7.68 7.68 (2) (3) (4) (5) (14) (16) (19) (35) (1) (4) (4) (9) (6) (6) 248 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 37. Financial Instruments (continued) Average price US$ 2006 Fair value US$m 2006 Average price US$ 2005 Fair value US$m 2005 Tonnes 2006 Tonnes 2005 Copper forwards – US$ denominated contracts: Maturing in less than 1 year Zinc forwards – US$ denominated contracts: Maturing in less than 1 year Lead forwards – US$ denominated contracts: Maturing in less than 1 year Coal forwards – US$ denominated contracts: South African FOB Maturing in less than 1 year Maturing between 1 to 2 years South African CIF Maturing in less than 1 year Maturing between 1 to 2 years Australian FOB Maturing in less than 1 year Colombian FOB Maturing in less than 1 year – – – – – – – – – – – – – – – – – – 49,750 49,750 12,104 12,104 58,375 58,375 2,746.62 2,746.62 1,412.05 1,412.05 956.68 956.68 (63) (63) (6) (6) (6) (6) 3,495,000 1,350,000 4,845,000 1,140,000 600,000 1,740,000 350,000 350,000 200,000 200,000 50.01 54.48 51.26 65.46 68.72 66.58 50.51 50.51 51.55 51.55 (7) (1) (8) (4) – (4) (1) (1) – – (104) 3,105,000 2,205,000 5,310,000 975,000 420,000 1,395,000 545,000 545,000 – – 51.82 48.82 50.57 56.80 60.95 58.05 38.32 38.32 – – 16 (2) 14 – – – (2) (2) – – (128) Xstrata plc Annual Report 2006 | 249 37. Financial Instruments (continued) Classified as other commodity derivatives: Average price US$ 2006 Fair value US$m 2006 Average price US$ 2005 Fair value US$m 2005 Ounces 2006 Ounces 2005 Gold forwards – AUD denominated contracts: Maturing in less than 1 year Gold forwards – US$ denominated contracts: Maturing in less than 1 year Gold options – US$ denominated contracts: Maturing in less than 1 year 14,250 14,250 20,834 20,834 8,500 8,500 541.20 541.20 386.30 386.30 500-560 500-560 (1) (1) (5) (5) (1) (1) (7) 28,252 28,252 36,332 36,332 – – 479.48 479.48 378.08 378.08 – – (2) (2) (5) (5) – – (7) Ounces 2006 Average forward rate % 2006 Fair value US$m 2006 Ounces 2005 Average forward rate % 2005 Fair value US$m 2005 Gold swaps – AUD denominated contracts: Maturing in less than 1 year Maturing between 1 to 2 years Maturing between 2 to 3 years Maturing between 3 to 4 years 30,000 40,600 10,600 – 81,200 1.5 1.5 1.5 – 1.5 Average price US$ 2006 1 – – – 1 Fair value US$m 2006 13,166 30,000 58,300 16,500 117,966 1.5 1.5 1.5 1.5 1.5 Average price US$ 2005 1 1 – – 2 Fair value US$m 2005 Tonnes 2006 Tonnes 2005 Copper forwards – US$ denominated contracts: Maturing in less than 1 year Zinc forwards – US$ denominated contracts: Maturing in less than 1 year – – – – – – – – – – – – – 56,050 56,050 41,321 41,321 3,056.54 3,056.54 1,412.05 1,412.05 (76) (76) (20) (20) (101) Other commodity derivatives in 2005 also includes zinc and lead forward contracts that were closed out from offsetting sales positions with settlement deferred into 2006 until the maturity dates of the sales forward contracts, with a loss of US$14 million. 250 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 37. Financial Instruments (continued) Fair values Set out below is a comparison by category of carrying value and fair values of the Group’s financial instruments that are not carried at fair value in the financial statements at 31 December: Carrying value 2006 Fair value 2006 Carrying value 2005 Fair value 2005 US$m Financial Liabilities: Capital market notes Convertible borrowings Equity minority interest loans Finance leases Preference shares Other loans 4,132 525 81 242 201 1 4,200 519 80 242 203 1 276 875 81 229 – – 271 873 80 229 – – Market rates at 31 December 2006 have been used to determine the fair value of fixed interest loans. The fair value of the liability portion of the convertible bonds are estimated using an equivalent market interest rate of a similar liability that does not have a conversion option as at the origination of the bond (refer to notes 26 and 29). 38. Events After Balance Sheet Date Convertible Bonds In February 2007, 22,832,325 ordinary shares were issued as a result of conversions by the holders of the Convertible Bonds (refer to note 29). On 15 March 2007, Xstrata Capital Corporation AVV exercised its right to call for the redemption of all of the outstanding convertible bonds. The terms and conditions of the bonds permit Xstrata Capital Corporation AVV to redeem all of the bonds at their principal amount plus accrued and unpaid interest up to and including the date fixed for redemption, following the exercise of 85% or more of the Convertible Bonds originally issued. As at 14 March 2007, US$14,730,000 or 2.455% of the principal amount of the Convertible Bonds originally issued was outstanding. The date fixed for redemption by the Xstrata Capital Corporation AVV is 16 April 2007. The last day on which conversion rights may be exercised by bondholders is 2 April 2007. Issue of ordinary shares On 31 January 2007, 4,000,000 shares were issued to the ESOP at a market price of GBP23.58 per share. Bakwena Ba Mogopa Community Joint Venture On 9 January 2007 the Group and the Bakwena Ba Mogopa Traditional Community (the Community) agreed terms for a US$82 million Black Economic Empowerment (BEE) transaction in respect of the Group’s South African Rhovan vanadium facility. The Community is the surface owner of the property on which the facility is located. Through the transaction, the Community will have an effective 26% participation in the Group’s vanadium business through a pooling and sharing venture. The transaction will also enable the Community to participate in any expansions on competitive terms. The transaction is subject to the standard regulatory approvals and is expected to be completed by 30 June 2007. Xstrata plc Annual Report 2006 | 251 Supplementary Information (unaudited) | Pro Forma Consolidated Income Statement For the year ended 31 December 2006 US$m Before exceptional items Exceptional items Total 2006 Before exceptional Items Exceptional items Total 2005 Revenue Cost of sales Distribution costs Administrative expenses Other expenses Other income Share of results from associates Profit on sale of investments Profit on sale of operations Restructuring and closure costs Profit before interest, taxation, depreciation and amortisation Depreciation and amortisation Profit before interest and taxation Finance income Finance costs Profit before taxation Income tax (expense)/benefit Profit from continuing operations Profit on sale of discontinued operations Profit for the year Attributable to: Equity holders of the parent Minority interests Earnings per share (US$) – basic (continuing operations) – basic 26,877 (14,554) (1,264) (632) (60) 65 9 – – – 10,441 (2,101) 8,340 171 (1,226) 7,285 (2,127) 5,158 – 5,158 – – – – – – – 63 16 – 79 – 79 170 (104) 145 (5) 140 – 140 26,877 (14,554) (1,264) (632) (60) 65 9 63 16 – 10,520 (2,101) 8,419 341 (1,330) 7,430 (2,132) 5,298 – 5,298 17,199 (9,982) (1,131) (292) (59) 76 32 – – – 5,843 (1,911) 3,932 83 (880) 3,135 (733) 2,402 – 2,402 – – – – – – – 17 – (10) 7 – 7 89 (44) 52 8 60 (4) 56 17,199 (9,982) (1,131) (292) (59) 76 32 17 – (10) 5,850 (1,911) 3,939 172 (924) 3,187 (725) 2,462 (4) 2,458 4,745 413 5,158 5.13 5.13 140 – 140 0.15 0.15 4,885 413 5,298 5.28 5.28 2,176 226 2,402 2.52 2.52 56 – 56 0.06 0.06 2,232 226 2,458 2.58 2.58 252 | Xstrata plc Annual Report 2006 Notes to the Pro Forma Consolidated Income Statement The Pro Forma financial information has not been audited by Ernst & Young LLP. The 2006 Pro Forma Income Statement and segmental information for the Group is prepared to illustrate the effect the Falconbridge Group, Cerrejón and Tintaya acquisitions, rights issue, the May 2006 new shares issue and related debt draw downs, would have had if they had taken place on 1 January 2006. The 2005 Pro Forma Income Statement and segmental information for the Group is prepared to illustrate the effect the Falconbridge Group, Cerrejón and Tintaya acquisitions, rights issue, the May 2006 new shares issue and related debt draw downs, would have had if they had taken place on 1 January 2005. The pro forma financial information for the year ended 31 December 2005 has been extracted from the Xstrata plc Rights Issue prospectus dated October 2006 and updated to reflect amendments to Tintaya’s 2005 income statement, the financing structure of the Group and a change in the method in applying deferred tax to acquisition fair value adjustments to reflect the intention to realise the assets’ values through use. The pro forma information for 2005 and 2006 excludes certain exceptional items relating to the Falconbridge acquisition, so as not to distort the results of the Group by these one off items. The exceptional items excluded include the goodwill impairment and certain restructuring costs. Reconciliation of Pro Forma and Statutory Financial Statements Before exceptional items Exceptional items Total 2006 Before exceptional Items Exceptional items Total 2005 US$m Revenue Statutory revenue Cerrejón pre-acquisition revenue Tintaya pre-acquisition revenue Falconbridge Group pre-acquisition revenue Total EBITDA Statutory EBITDA Cerrejón pre-acquisition EBITDA Tintaya pre-acquisition EBITDA Falconbridge Group pre-acquisition EBITDA Falconbridge fair value and pro forma adjustments Total EBIT Statutory EBIT Cerrejón pre-acquisition EBIT Tintaya pre-acquisition EBIT Falconbridge Group pre-acquisition EBIT Falconbridge fair value and pro forma adjustments Total Profit Statutory profit Cerrejón pre-acquisition profit Tintaya pre-acquisition profit Falconbridge Group pre-acquisition profit Fund raising and cost of acquisitions adjustments Fair value and pro forma adjustments Total 17,632 140 329 8,776 26,877 – – – – – 17,632 140 329 8,776 26,877 8,050 441 410 8,298 17,199 – – – – – 8,050 441 410 8,298 17,199 7,107 71 218 2,957 88 10,441 29 – – (601) 651 79 7,136 71 218 2,356 739 10,520 3,103 242 221 2,288 (11) 5,843 (10) – – 17 – 7 3,093 242 221 2,305 (11) 5,850 5,863 45 175 2,632 (375) 8,340 (1,349) – – (601) 2,029 79 4,514 45 175 2,031 1,654 8,419 2,520 177 139 1,807 (711) 3,932 (10) – – 17 – 7 2,510 177 139 1,824 (711) 3,939 3,755 30 136 1,619 (167) (215) 5,158 (1,403) – – (403) – 1,946 140 2,352 30 136 1,216 (167) 1,731 5,298 1,877 121 78 1,072 (185) (561) 2,402 46 – – 10 – – 56 1,923 121 78 1,082 (185) (561) 2,458 Xstrata plc Annual Report 2006 | 253 Pro forma Segmental Analysis for the year ended 31 December US$m Before exceptional items Exceptional items Total 2006 Before exceptional Items Exceptional items Total 2005 Revenue External parties: Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Revenue (continuing operations) EBITDA Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated EBITDA (continuing operations) Profit on sale of discontinued operations: Forestry Unallocated Total Depreciation and amortisation Coal Chrome Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated Total (continuing operations) 3,757 748 12 199 12,508 3,364 4,774 1,395 120 26,877 – – – – – – – – – – 3,757 748 12 199 12,508 3,364 4,774 1,395 120 26,877 3,841 798 – 318 6,927 2,161 1,997 1,080 77 17,199 – – – – – – – – – – 3,841 798 – 318 6,927 2,161 1,997 1,080 77 17,199 1,320 141 11 111 5,399 1,386 1,946 286 26 (185) 10,441 – – 10,441 16 – – – – – – – – 63 79 – – 79 1,336 141 11 111 5,399 1,386 1,946 286 26 (122) 10,520 – – 10,520 1,588 169 – 181 2,697 721 398 158 14 (83) 5,843 – – 5,843 – – – – – – – – – 7 7 4 (8) 3 1,588 169 181 2,697 721 398 158 14 (76) 5,850 4 (8) 5,846 383 23 6 871 455 273 78 4 8 2,101 – – – – – – – – – – 383 23 6 871 455 273 78 4 8 2,101 332 27 6 845 388 212 83 4 14 1,911 – – – – – – – – – – 332 27 6 845 388 212 83 4 14 1,911 254 | Xstrata plc Annual Report 2006 Pro forma Segmental Analysis (continued) for the year ended 31 December US$m Before exceptional items Exceptional items Total 2006 Before exceptional Items Exceptional items Total 2005 Profit before interest and taxation (EBIT) Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated EBIT (continuing operations) Profit on sale of discontinued operations: Forestry Unallocated Total 937 118 11 105 4,528 931 1,673 208 22 (193) 8,340 – – 8,340 16 – – – – – – – – 63 79 – – 79 953 118 11 105 4,528 931 1,673 208 22 (130) 8,419 – – 8,419 1,256 142 – 175 1,852 333 186 75 10 (97) 3,932 – – 3,932 – – – – – – – – – 7 7 4 (8) 3 1,256 142 – 175 1,852 333 186 75 10 (90) 3,939 4 (8) 3,935 Xstrata plc Annual Report 2006 | 255 US$m 2006 2005 Capital expenditure Sustaining: Coal Chrome Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated Total sustaining (continuing operations) Expansionary: Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated Total expansionary (continuing operations) Total: Coal Chrome Platinum Vanadium Copper Nickel Zinc Lead Aluminium Technology Unallocated Total (from continuing operations) 235 36 4 257 162 114 33 1 5 847 295 161 58 1 257 210 158 22 1 – 1,163 530 197 58 5 514 372 272 55 2 5 2,010 226 26 9 246 162 94 42 1 5 811 292 161 – 7 178 205 47 14 – 33 937 518 187 – 16 424 367 141 56 1 38 1,748 256 | Xstrata plc Annual Report 2006 Pro forma Segmental Analysis (continued) for the year ended 31 December Geographical segments The following tables present revenue and profit information and certain asset and liability information regarding the Group’s geographical segments for the years ended 31 December 2006 and 2005. For the year ended 31 December Before exceptional items Exceptional items Total 2006 Before exceptional Items Exceptional items Total 2005 US$m Revenue by origin External parties: Africa Americas North Americas South Australasia Europe Revenue (continuing operations) Revenue by destination External parties: Africa Americas North Americas South Asia Australasia Europe Middle east Revenue (continuing operations) EBITDA Africa Americas North Americas South Australasia Europe Unallocated EBITDA (continuing operations) Profit on sale of discontinued operations: Americas South Unallocated Total 1,673 10,399 7,396 4,815 2,594 26,877 – – – – – – 1,673 10,399 7,396 4,815 2,594 26,877 1,906 5,779 4,219 4,086 1,209 17,199 – – – – – – 1,906 5,779 4,219 4,086 1,209 17,199 243 8,935 1,180 6,801 923 8,694 101 26,877 – – – – – – – – 243 8,935 1,180 6,801 923 8,694 101 26,877 237 5,114 1,099 4,701 655 5,281 112 17,199 – – – – – – – – 237 5,114 1,099 4,701 655 5,281 112 17,199 439 2,674 4,444 2,519 550 (185) 10,441 – – 10,441 – – – 16 – 63 79 – – 79 439 2,674 4,444 2,535 550 (122) 10,520 – – 10,520 621 1,059 2,267 1,802 177 (83) 5,843 – – 5,843 – – – – – 7 7 4 (8) 3 621 1,059 2,267 1,802 177 (76) 5,850 4 (8) 5,846 Xstrata plc Annual Report 2006 | 257 US$m Before exceptional items Exceptional items Total 2006 Before exceptional Items Exceptional items Total 2005 Depreciation and amortisation Africa Americas North Americas South Australasia Europe Unallocated Total (continuing operations) EBIT Africa Americas North Americas South Australasia Europe Unallocated EBIT (continuing operations) Profit on sale of discontinued operations: Americas South Unallocated Total 106 832 728 390 37 8 2,101 – – – – – – – 106 832 728 390 37 8 2,101 111 731 692 327 36 14 1,911 – – – – – – – 111 731 692 327 36 14 1,911 333 1,842 3,716 2,129 513 (193) 8,340 – – 8,340 – – – 16 – 63 79 – – 79 333 1,842 3,716 2,145 513 (130) 8,419 – – 8,419 510 328 1,575 1,475 141 (97) 3,932 – – 3,932 – – – – – 7 7 4 (8) 3 510 328 1,575 1,475 141 (90) 3,939 4 (8) 3,935 258 | Xstrata plc Annual Report 2006 Pro forma Segmental Analysis (continued) for the year ended 31 December US$m 2006 2005 Capital expenditure Sustaining: Africa Americas North Americas South Australasia Europe Unallocated Total sustaining (continuing operations) Expansionary: Africa Americas North Americas South Australasia Europe Unallocated Total expansionary (continuing operations) Total: Africa Americas North Americas South Australasia Europe Unallocated Total (continuing operations) 99 211 178 324 30 5 847 352 225 113 450 23 – 1,163 451 436 291 774 53 5 2,010 94 220 180 284 28 5 811 208 238 44 401 13 33 937 302 458 224 685 41 38 1,748 Xstrata plc Annual Report 2006 | 259 Review of the fair value adjustments at 31 December 2006 versus previously reported The review of the fair value of the Falconbridge assets and liabilities acquired will continue for 12 months from the acquisition date. A summary of the changes made between the fair value adjustments reported in the financial statements above and as reported in the Xstrata plc Rights Issue prospectus dated October 2006 is as follows: Provisional amounts reported in 2006 financial statements US$m As reported in Rights Issue Prospectus Changes Fair value adjustments: Intangible assets Property, plant and equipment Inventories Trade and other receivables Investments in associates Trade and other payables Interest-bearing loans and borrowings Provisions Deferred tax liabilities Income tax payable Other Attributable net assets acquired (including cash) Goodwill relating to deferred tax Fair value of net assets including goodwill 80.1% share of net assets acquired Cash paid for 80.1% acquired (including acquisition costs) Goodwill arising on purchase of 80.1% interest 220 12,225 – – – – (50) (300) (1,405) – (45) 4,212 14,857 1,500 16,357 13,085 17,085 4,000 154 12,255 (34) (8) 95 23 (35) (391) (2,688) (13) – 4,006 13,364 2,859 16,223 12,995 17,104 4,109 (66) 30 (34) (8) 95 23 15 (91) (1,283) (13) 45 (206) (1,493) 1,359 (134) 90 19 109 The increase in the deferred tax liability and the goodwill related to deferred tax is primarily the result of the change in the method in applying deferred tax to acquisition fair value adjustments to reflect the intention to realise the asset’s values through use. The increase in the provisions adjustment is mainly due to adjustments to the defined benefit pension plan deficits following updated reported received from independent actuaries and updated rehabilitation cost estimates. 260 | Xstrata plc Annual Report 2006 Statement of Directors’ Responsibilities In Relation to the Parent Company Financial Statements The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing those financial statements, the directors are required to: I I I I select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Xstrata plc Annual Report 2006 | 261 Independent Auditors’ Report to the Shareholders of Xstrata plc We have audited the parent company financial statements of Xstrata plc for the year ended 31 December 2006 which comprise the balance sheet and the related notes 1 to 11. These parent company financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the remuneration report that is described as having been audited. We have reported separately on the group financial statements of Xstrata plc for the year ended 31 December 2006. This report is made solely to the company's members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors are responsible for preparing the annual report, the remuneration report and the parent company financial statements in accordance with applicable United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) as set out in the statement of directors’ responsibilities. Our responsibility is to audit the parent company financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the parent company financial statements give a true and fair view and whether the parent company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the parent company directors' report is consistent with the financial statements. In addition we report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed. We read other information contained in the annual report and consider whether it is consistent with the audited parent company financial statements. The other information comprises only the directors’ report, the unaudited part of the remuneration report, the chairman’s statement, the operating and financial review and the corporate governance statement. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent company financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent company financial statements and the part of the remuneration report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the parent company financial statements, and of whether the accounting policies are appropriate to the company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the parent company financial statements and the part of the remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the parent company financial statements and the part of the Directors’ Remuneration Report to be audited. Opinion In our opinion: I the parent company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the company's affairs as at 31 December 2006; I the parent company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and I the information given in the directors' report is consistent with the parent company financial statements. Ernst & Young LLP Registered auditor London, England 20 March 2007 262 | Xstrata plc Annual Report 2006 Balance Sheet As at 31 December 2006 US$m Notes 2006 2005 Fixed assets Investments Current assets Debtors: amounts falling due within one year Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Provisions for liabilities Attributable net assets Capital and reserves Called up share capital Share premium account Other reserves Own shares Profit and loss account Equity shareholders’ funds 2 11,218 11,218 4,606 4,606 5 5 (547) (542) 4,064 (12) 4,052 3 4 34 (14) 20 11,238 (58) 11,180 5 7, 8 8 8 8 8 471 9,522 949 (147) 385 11,180 316 2,500 949 (35) 322 4,052 The financial statements on pages 262 to 275 were approved by the Board of Directors on 20 March 2007 and signed on its behalf by: Trevor Reid Chief Financial Officer No profit and loss account is presented for Xstrata plc as permitted by section 230 of the Companies Act 1985. The profit of Xstrata plc for the year ended 31 December 2006 is US$294 million (2005 US$406 million). There are no recognised gains and losses attributable to the shareholders of the company other than the profit of US$294 million for the year ended 31 December 2006 (2005 profit of US$406 million). Xstrata plc Annual Report 2006 | 263 Notes to the Financial Statements 1. Accounting policies Basis of preparation These financial statements have been prepared in accordance with applicable UK accounting standards. Xstrata plc (the Company) has adopted the following principal accounting policies: Investments Equity investments in subsidiaries are carried at cost less any provision for impairments. Financial Assets – Loans and Receivables Financial assets are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments or available-for-sale financial assets, as appropriate. The Company determines the classification of its financial assets at initial recognition. When financial assets are recognised initially, they are measured at fair value on the trade date, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have not been designated as either fair value through profit and loss or available for sale. Such assets are carried at amortised cost using the effective interest method. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. Gains and losses are recognised in the profit and loss account when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Loans and receivables are derecognised when the Company no longer has a right to receive cash flows from the asset. If there is objective evidence that an impairment loss on loans and receivables have been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (ie the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss account. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the profit and loss account, to the extent that the carrying value of the asset does not exceed its amortised cost (that would have been measured if there had been no impairment) at the reversal date. Impairment The carrying values of fixed assets are reviewed for impairment if events or changes in circumstances indicate the carrying values may not be recoverable. If there are indicators of impairment, an exercise is undertaken to determine whether the carrying values are in excess of their recoverable amounts. Such reviews are undertaken on income generating units. If the carrying values of fixed assets exceed their recoverable amounts, a provision is recorded to reflect the assets at their lower amount. In assessing the recoverable amounts of fixed assets, the relevant future cash flows expected to arise from the continuing use of and disposal of the assets have been discounted to their present value using a market-determined discount rate. Provisions for liabilities Provisions are recognised when the Company has a present obligation, as a result of past events, and it is probable that an outflow of resources that can be reliably estimated will be required to settle the obligation. 264 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 1. Accounting policies (continued) Deferred taxation Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date that will result in an obligation to pay more, or a right to pay less, tax in the future. In particular: – provision is made for tax on gains arising from the disposal of fixed assets, only to the extent that, at the balance sheet date, there is a binding agreement to dispose of the assets concerned. However, no provision is made where, on the basis of all available evidence at the balance sheet date, it is more likely than not that the taxable gain will be rolled over into replacement assets and charged to tax only when the replacement assets are sold; – provision is made for deferred tax that would arise on remittance of the retained earnings of overseas entities only to the extent that, at the balance sheet date, dividends have been accrued as receivable; and – deferred tax assets are recognised only to the extent that, it is considered that, it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Own shares The cost of purchases of own shares held by the Employee Share Ownership Plan (ESOP) trust are deducted from equity. Where they are issued to employees or sold, no gain or loss is recognised in the profit and loss account. Any proceeds received on the disposal of the shares or on the transfer of shares to employees are recognised in equity. Share-based payments The Company makes share-based awards, including free shares and options in the Company, to certain employees and Directors of the Group. The expense recognised in the financial statements relates only to those share-based awards that are granted by the Company, to its employees and Directors and to the employees of the Group who provide services to the Company. Equity-settled awards For equity-settled awards, the fair value is charged to the profit and loss account and credited to retained earnings, on a straight line basis over the vesting period, after adjusting for the estimated number of awards that are expected to vest (taking into account the achievement of nonmarket based performance conditions). The fair value of the equity-settled awards is determined at the date of the grant. In calculating fair value, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of the Company (market conditions). The fair value is determined by external experts using the models outlined in note 10. At each balance sheet date prior to vesting, the cumulative expense representing the extent to which the vesting period has expired and management’s best estimate of the awards that are ultimately expected to vest is computed (after adjusting for non-market performance conditions). The movement in cumulative expense is recognised in the profit and loss account with a corresponding entry within equity. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified over the original vesting period. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification, over the remainder of the new vesting period. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. Any compensation paid up to the fair value of the awards at the cancellation or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the profit and loss account. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the new award is treated as if it is a modification of the original award, as described in the previous paragraph. Xstrata plc Annual Report 2006 | 265 1. Accounting policies (continued) Cash-settled awards For cash-settled awards, the fair value is re-calculated at each balance date until the awards are settled based on the estimated number of awards that are expected to vest adjusting for market and non-market based performance conditions. During the vesting period, a liability is recognised representing the portion of the vesting period which has expired at the balance sheet date times the fair value of the awards at that date. After vesting the full fair value of the unsettled awards at each balance date is recognised as a liability. Movements in the liability are recognised in the profit and loss account. The fair value is recalculated using an option pricing model (refer to note 10). The Group has taken advantage of the transitional provisions on adoption of these policies in relation to unvested equity-settled awards and has applied the above policies only to awards granted after 7 November 2002 that had not vested prior to 1 January 2005. Loans from subsidiaries Loans from subsidiaries are recognised at inception at the fair value of the proceeds received net of issue costs. Subsequently they are measured at amortised cost using the effective interest method. Finance costs are recognised in the profit and loss account using the effective interest rate method. Foreign currency transactions Foreign currency transactions are booked in the functional currency (US$) at the exchange rate ruling on the date of the transaction. Foreign currency monetary assets and liabilities are translated into the functional currency at rates of exchange ruling at the balance sheet date. Exchange differences are recorded in the profit and loss account. Foreign currency non-monetary assets and liabilities are not restated at balance sheet date. Revenue Interest income is recognised as earned on an accruals basis using the effective interest method. Dividend income is recognised as earned when the Company’s right to receive payment is established. Income for other services is recognised when the service has been rendered, when the amount of revenue (and associated costs) can be reliably measured and it is probable that economic benefits will flow to the Company. Comparatives Where applicable, comparatives have been adjusted to disclose them on the same basis as current period figures. Use of estimates The preparation of these financial statements is in conformity with generally accepted accounting practice and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual outcomes could differ from these estimates. 266 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 2. Investments US$m Investment in subsidiaries Loans to subsidiaries Total Cost: At 1 January 2006 Additions – new investments Additions – existing investments At 31 December 2006 4,174 4,922 395 9,491 432 – 1,295 1,727 4,606 4,922 1,690 11,218 The subsidiary undertakings of the Company as at 31 December and the percentage holding of ordinary share capital are set out below: Country of incorporation % of ordinary shares held & voting rights Name Principal Subsidiaries Principal activities Xstrata Xstrata Xstrata Xstrata Xstrata (Schweiz) AG* Finance (Dubai) LLC Commodities Middle East DMCC Capital Corporation AVV* Zinc BV Switzerland UAE UAE Aruba Holland Holding Finance Marketing Finance Finance company company company company company 100% 90% 90% 40%** 75% *These subsidiaries were also held at 31 December 2005. **The voting rights are 51%. The principal country of operation is the country of incorporation, and all subsidiaries are unlisted. Refer to note 36 of the consolidated financial statements for a list of the Group’s significant subsidiaries, associates and joint ventures. 3. Debtors – amounts falling due within one year US$m 2006 2005 Receivables – subsidiaries Other debtors 28 6 34 – 5 5 4. Creditors – amounts falling due within one year US$m 2006 2005 Loans from subsidiaries Other creditors 8 6 14 546 1 547 Xstrata plc Annual Report 2006 | 267 5. Provisions Share-based compensation plans 2006 US$m At 1 January 2006 Arising during the year Utilised At 31 December 2006 12 49 (3) 58 The Company has various share-based compensation plans under which options to subscribe for the Company’s shares have been granted to Directors and employees of the Company and employees of the Group who provide services to the Company. The intrinsic value of the options that had vested at 31 December 2005 was US$17 million (2005 US$1 million). 6. Dividends Paid and Proposed US$m 2006 2005 Declared and paid during the year: Final dividend for 2005 – 22.4 cents per ordinary share (2004 – 14.3 cents per ordinary share) Interim dividend for 2006 – 11.6 cents per ordinary share (2005 – 8.1 cents per ordinary share) 159 92 251 100 54 154 Proposed for approval at the Annual General Meeting (not recognised as a liability as at 31 December): Final dividend for 2006 – 30 cents per ordinary share (2005 – 22.4 cents per ordinary share) 281 150 Dividends declared in respect of the year ended 31 December 2006 will be paid on 18 May 2007. Own shares held in the ESOP have waived the right to receive dividends. The dividends per share declared and paid prior to 30 October 2006 have been adjusted by the rights issue bonus adjustment factor of 0.9 (refer to note 7). 268 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 7. Capital US$m Authorised: 875,000,000 ordinary shares of US$0.50 each as at 1 January and 31 December 2005 and as at 1 January 2006 14,234,948,397 ordinary shares of US$0.50 each increase on 30 June 2006 15,109,948,397 ordinary shares of US$0.50 each as at 31 December 2006 50,000 deferred shares of GBP1.00 each as at 1 January and 31 December 2005 and as at 1 January and 31 December 2006 1 special voting share of US$0.50 as at 1 January and 31 December 2005 and as at 1 January and 31 December 2006 438 7,117 7,555 – – 7,555 Issued, called up and fully paid: 631,502,416 ordinary shares of US$0.50 each as at 1 January 2005 1,000,000 ordinary shares issued on 24 March 2005 to the ESOP 632,502,416 ordinary shares of US$0.50 each as at 31 December 2005 and 1 January 2006 3,000,000 ordinary shares issued on 28 March 2006 to the ESOP 32,543,344 ordinary shares issued on 22 May 2006 to institutional investors 235,787,596 ordinary shares issued on 30 October 2006 from a shareholder rights issue 39,317,027 ordinary shares issued on the exercise of convertible bonds during 2006 943,150,383 ordinary shares as at 31 December 2006 50,000 deferred shares of GBP1.00 each paid to GBP0.25 as at 1 January and 31 December 2005 and as at 1 January and 31 December 2006 1 special voting share of US$0.50 as at 1 January and 31 December 2005 and as at 1 January and 31 December 2006 Issue of ordinary shares During March 2005, 1,000,000 shares were issued to the ESOP at a market price of GBP10.20 per share. During March 2006, 3,000,000 shares were issued to the ESOP at a market price of GBP18.72 per share. On 22 May 2006, 32,543,344 shares were issued to institutional investors at a market price of GBP21.00 per share. During 2006, a portion of the US$600 million convertible bonds issued by Xstrata Capital Corporation AVV were converted by the holders. In accordance with the guarantee provided by the Company to Xstrata Capital Corporation AVV, 39,317,027 ordinary shares were issued in exchange for the 385,581 preference shares in Xstrata Capital Corporation AVV. 315 1 316 1 16 118 20 471 – – On 30 October 2006, 235,787,596 ordinary shares were issued under a rights issue which was structured as an issue of 1 new ordinary share at a price of GBP 12.65 per share for every 3 existing ordinary shares held. The net proceeds from the rights issue was US$5,432 million (after US$186 million of capital raising costs) and the number of shares in issue of Xstrata plc following the completion of the rights issue is 943,150,383. Deferred shares The holders of deferred shares do not have the right to receive notice of any general meeting of the Company nor the right to attend, speak or vote at any such general meeting. The deferred shares have no rights to dividends and, on a winding-up or other return of capital and entitle the holder only to the repayment of the amounts paid upon such shares after repayment of the nominal amount paid up on the Ordinary Shares, the nominal amount paid up on the special voting share plus the payment of GBP100,000 per Ordinary Share. The Company may, at its option, redeem all of the deferred shares in issue at any time (but subject to the minimum capital requirement of the Companies Act 1985) at a price not exceeding GBP1.00 for each share redeemed to be paid to the relevant registered holders of the shares. Xstrata plc Annual Report 2006 | 269 7. Capital (continued) Special voting share Certain rights, that are inalienable under Swiss law, have been preserved in the Xstrata plc Articles of Association by creating a special voting share that carries weighted voting rights sufficient to defeat any resolution which could amend or remove these entrenched rights. The holder of the special voting share is the Law Debenture Trust Corporation plc which has entered into a voting agreement with the Company, specifying the conditions upon which it is entitled to exercise its right to vote. The special voting share does not carry a right to receive dividends and is entitled to no more than the amount of capital paid up in the event of liquidation. 8. Capital and reserves Share capital Share premium account Other reserves Own shares Profit and loss account US$m 2006 Capital and Reserves At 1 January 2006 Attributable profit for the year Issue of share capital Own shares purchased Own shares sold Equity settled share-based payments Dividends At 31 December 2006 316 – 155 – – – – 471 2,500 – 7,022 – – – – 9,522 Share premium account 949 – – – – – – 949 (35) – (136) (11) 35 – – (147) 322 294 – – (22) 42 (251) 385 Profit and loss account 4,052 294 7,041 (11) 13 42 (251) 11,180 US$m Share capital Other reserves Own shares 2005 Capital and Reserves At 1 January 2005 Attributable profit for the year Issue of share capital Own shares sold Equity settled share-based payments Exercise of pre-FRS 20 option awards Dividends At 31 December 2005 Own shares Own shares comprise shares of Xstrata plc held in the ESOP. 315 – 1 – – – – 316 2,482 – 18 – – – – 2,500 949 – – – – – – 949 (33) – (19) 17 – – – (35) 60 406 – 8 6 (4) (154) 322 3,773 406 – 25 6 (4) (154) 4,052 The shares acquired by the ESOP are either stock market purchases or from share issues from the Company. The ESOP is used to co-ordinate the funding and manage the delivery of ordinary shares for options and free share awards under the Group’s employee award schemes. The trustee of the ESOP is permitted to place the shares back into the market and may hold up to 5% of the issued share capital of the Company at any one time. At 31 December 2006, 6,173,747 (2005: 3,603,888) shares, equivalent to 0.7% (2005: 0.6%) of the total issued share capital, were held by the trust with a cost of US$147 million (2005 US$35 million) and market value of US$308 million (2005 US$84 million). The trust has waived the right to receive dividends from the shares that it holds. Costs relating to the administration of the trust are expensed in the period in which they are incurred. On 31 January 2007, a further 4 million ordinary shares were issued by the Company to the ESOP. 270 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 9. Other income and expenses The audit fee is US$40,000 (2005 US$50,000) in respect of the Company. Refer to note 10 of the consolidated financial statements for further information of Auditor’s remuneration. Refer to the Remuneration report on pages 136 to 139 for the remuneration of Directors. 10. Share-based Payments The Group operates a number of share option plans which are outlined below and result in the Company granting options and awards over its shares. The expense recognised for share-based payments during the year ended 31 December 2006 was US$63 million (2005 US$17 million). The proportion of that expense arising from equity-settled share-based awards was US$14 (2005 US$6 million). Xstrata plc Long Term Incentive Plan (LTIP) The LTIP has two elements: (i) A contingent award of free ordinary shares that vests after three years, subject to, and to the extent that, performance criteria determined at the time of grant have been satisfied; and (ii) A share option to acquire ordinary shares at a specified exercise price after the third anniversary of grant, subject to, and to the extent that, performance criteria determined at the time of grant have been satisfied. All LTIP awards that vest are subject to the satisfaction of certain performance criteria being met over a three-year performance period. Half of the options and free share awards issued in 2004 and 2005 and one-third issued in 2006 are conditional on Total Shareholder Return (TSR) relative to a peer group, with the remainder conditional on the Group’s real cost savings relative to targets set on a stretching scale over the three-year period. The 2003 LTIP awards are only subject to the TSR performance criteria. For the awards conditional on TSR, one-half of the combined award will vest if TSR growth is at the median of the specified peer group, the full combined award will vest for performance at or above the second decile with straight line vesting between these points. No vesting will occur for below median performance. For the remaining award, vesting is conditional on the Group’s real cost savings relative to targets set on a stretching scale: 10% of the combined award will vest for 1% cost savings, 70% for 2% cost savings and all awards for 3% or more cost savings, with straight line vesting between these points. No vesting will occur if cost savings are less than 1%. Real cost savings will be measured in relation to operating costs after adjusting for the effects of inflation, excluding depreciation, commodity price linked costs, effects of currencies on translation of local currency costs and planned life of mine adjustments. No other features of the LTIP awards were incorporated into the measurement of fair value. No consideration will be payable on the vesting of an LTIP award of free ordinary shares. On exercise of an option, a participant will be required to pay an exercise price which will not be less than the market value of an ordinary share on the date of grant. Of the below options, 1.9 million (2005: 1.6 million) are accounted for as cash-settled share-based awards whilst the remainder of the LTIP awards are equity-settled. Xstrata plc Annual Report 2006 | 271 10. Share-based Payments (continued) The movement in the number of free ordinary shares and share options are as follows: Free Shares 2006 No. 2006 WAEP 2005 No. 2005 WAEP Outstanding as at 1 January Granted during the year Granted through rights issue Forfeited during the year Exercised during the year Expired during the year Outstanding as at 31 December Exercisable at 31 December 1 2 3 4 3,675,6671 852,536 436,8382 (121,974) (675,586)3 (38,116) 4,129,365 – NA NA NA NA NA NA NA NA 2,462,3621 1,325,723 – (26,901) (78,676)4 (6,841) 3,675,667 – NA NA NA NA NA NA NA NA There are no shares included in this balance that have not been recognised in accordance with IFRS 2 Share-based Payments. These awards were issued as a result of the rights issue in October 2006 (refer to note 7) The weighted average share price at the date of exercise of these awards was GBP17.56 The weighted average share price at the date of exercise of these awards was GBP9.97 The weighted average remaining contractual life for the free shares outstanding as at 31 December 2006 is 8.0 years (2005: 8.4 years). The weighted average fair value of free shares granted during the year was US$22.25 (2005: US$14.76). Share Options 2006 No. 2006 WAEP 2005 No. 2005 WAEP Outstanding as at 1 January Granted during the year Granted through rights issue Forfeited during the year Exercised during the year Expired during the year Outstanding as at 31 December Exercisable at 31 December 1 2 3 4 5 12,191,1181 2,812,204 1,531,0632 (406,582) (1,559,147)3 (117,926) 14,450,7305 637,630 GBP7.82 GBP16.15 GBP9.25 GBP9.99 GBP3.57 GBP3.53 GBP9.26 GBP3.22 8,442,932 4,419,089 – (91,221) (524,792)4 (54,890) 12,191,118 106,444 GBP6.27 GBP10.60 – GBP7.94 GBP6.25 GBP7.94 GBP7.82 GBP6.27 There are no shares included in this balance that have not been recognised in accordance with IFRS 2 Share-based Payments, except for 106,444 options issued in 2002. These awards were issued as a result of the rights issue in October 2006 (refer to note 7). The weighted average share price at the date of exercise of these options was GBP17.75. The weighted average share price at the date of exercise of these options was GBP11.49. All the share options included in this balance have been recognised in accordance with IFRS 2 Share-based Payments, except for 81,013 options isssued in 2002. The weighted average remaining contractual life for the share options outstanding as at 31 December 2006 7.9 years (2005: 8.4 years). The weighted average fair value of options granted during the year was US$7.72 (2005: US$5.31). The range of exercise prices for options outstanding at the end of the year was GBP3.22 – GBP15.37 (2005: GBP3.60 – GBP10.60). These exercise prices were adjusted by a factor of 0.9 due to the rights issue in October 2006. 272 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 10. Share-based Payments (continued) The following table lists the inputs to the models used to measure the fair value of equity settled awards granted: Date of grant 2006 Date of grant 2005 Dividend yield (%) Expected volatility (%) Risk-free interest rate (%) Earliest exercise date Latest exercise date Expected exercise date Share price at date of grant (GBP) Exercise price (GBP) Free share fair value at date of grant (GBP) Option fair value at date of grant (GBP) 1.3 31 4.4 10 Mar 2009 9 Mar 2016 17 Nov 2009 17.03 17.17 16.38 4.49 3.14 31 4.9 11 Mar 2008 10 Mar 2015 10 Sep 2011 10.48 10.60 9.54 3.05 The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historic volatility is indicative of future trends, which may also not necessarily be the actual outcome. Both the free shares and the equity settled options are equity settled plans and the fair value is measured at the date of grant. The fair value of the cash settled options is measured at the date of grant and at each reporting date until the liability is settled, using the Black Scholes option pricing model, taking into account the terms and conditions of the award. Xstrata AG incentive plan With the merger of Xstrata AG into Xstrata plc, Xstrata plc assumed the obligations of Xstrata AG under the scheme with the number of options and exercise price adjusted accordingly. The share options have a two year vesting period followed by a three year exercise period. The exercise price was the share price at the date of granting of the share options. There are no other conditions attaching to these options and they can be cash-settled by the holder. No further options will be granted under this incentive plan. All of the options below are accounted for as cash-settled share-based awards. The movement in the number of share options are as follows: 2006 No. 2006 WAEP 2005 No. 2005 WAEP Outstanding as at 1 January Granted through rights issue Exercised during the year Expired during the year Outstanding as at 31 December Exercisable at 31 December 1 2 3 4 173,3311 1,5022 (147,846)3 (12,667) 14,320 14,320 CHF27.63 CHF13.41 CHF25.64 CHF25.64 CHF13.41 CHF13.41 1,873,730 – (1,010,112)4 (690,287) 173,331 173,331 CHF21.40 – CHF19.73 CHF22.28 CHF27.63 CHF27.63 There are no shares included in this balance that have not been recognised in accordance with IFRS 2 Share-based Payments. These awards were issued as a result of the rights issue in October 2006 (refer to note 26) The weighted average share price at the date of exercise of these options was CHF35.89. The weighted average share price at the date of exercise of these options was CHF26.99. The weighted average remaining contractual life for the share options outstanding as at 31 December 2006 is 0.1 years (2005: 0.2 years). No new shares were granted during the year. The exercise price for options outstanding at the end of the year is CHF 13.41 (2005 range: CHF14.98 – CHF28.64). These exercise prices were adjusted by a factor of 0.9 due to the rights issue in October 2006. Xstrata plc Annual Report 2006 | 273 10. Share-based Payments (continued) Directors’ Service contracts Options were granted to 2 executive Directors’ pursuant to the terms of on which they were recruited. The options are to be equity-settled. The exercise price was the share price at the date of granting of the share options. The final scheme vests in January 2007 and each scheme has an exercise period of seven years. If the holder ceases to be employed by the Group for any reason, they may exercise any vested options within six months of such cessation, after which the options lapse. Any unvested options will lapse if the holder is dismissed lawfully under the terms of their contract or if they voluntarily resign except where they have a valid reason to terminate their employment as defined in their employment contract, in which case all unvested options shall immediately vest and become exercisable for a period of six months. In all other cases, they will remain exercisable for a period of six months. The movement in the number of share options are as follows: 2006 No. 2006 WAEP 2005 No. 2005 WAEP Outstanding as at 1 January Granted through rights issue Exercised during the year Expired during the year Outstanding as at 31 December Exercisable at 31 December 1 2 3 1,334,580 156,4131 (248,501)2 – 1,242,492 993,994 GBP4.75 GBP3.69 GBP3.69 – GBP4.36 US$4.03 1,779,440 – (444,860)3 – 1,334,580 444,860 CHF12.53 and GBP4.75 – CHF12.53 – GBP4.75 GBP4.29 These awards were issued as a result of the rights issue in October 2006 (refer to note 7) The weighted average share price at the date of exercise of these options was US$48.32 The weighted average share price at the date of exercise of these options was CHF23.45 The above share options have not been accounted for in accordance with IFRS 2 Share-based Payments as the options were granted on or before 7 November 2002 and have not been subsequently modified. The weighted average remaining contractual life for the share options outstanding as at 31 December 2006 is 6.4 years (2005: 7.4 years). No new shares were granted during the year. The range of exercise prices for options outstanding at the end of the year was £3.84 – £5.68 (2005: £4.12 – £6.35 and CHF 12.53). These exercise prices were adjusted by a factor of 0.9 due to the rights issue in October 2006. Xstrata AG Directors’ Incentive Scheme With the merger of Xstrata AG into Xstrata plc, Xstrata plc assumed the obligations of Xstrata AG under the scheme with the number of options and exercise price adjusted accordingly. The share options have a two year vesting period followed by a three year exercise period. The exercise price was the share price at the date of granting of the share options. There are no other conditions attaching to these options and they can be cash-settled by the holder. All of the options below are accounted for as cash-settled share-based awards. No further options will be granted under this incentive plan. The movement in the number of share options are as follows: 2006 No. 2006 WAEP 2005 No. 2005 WAEP Outstanding as at 1 January Expired during the year Outstanding as at 31 December Exercisable at 31 December 15,231 (15,231) – – CHF28.64 CHF28.64 – – 91,310 (76,079) 15,231 15,231 CHF23.34 CHF22.28 CHF28.64 CHF28.64 The weighted average remaining contractual life for the share options outstanding as at 31 December 2005 was 0.1 years. The range of exercise prices for options outstanding at the end of the 2005 was CHF28.64 – CHF28.64. No new shares were granted during the year, and there are no outstanding shares under this scheme at 31 December 2006. 274 | Xstrata plc Annual Report 2006 Notes to the Financial Statements 10. Share-based Payments (continued) Deferred Bonus As detailed within the Remuneration Report on pages 126 to 139, the maximum bonus payable under the Bonus Plan for Executive Directors and the members of the Executive Committee is 300% of salary. Bonuses are payable in three tranches as follows: – – – the maximum bonus, which any one participant is eligible to receive in cash, will be limited to 100% of the individual’s base salary; any additional bonus up to a further 100% of base salary will be deferred for a period of one year; and any remaining bonus will be deferred for a period of two years. The deferred elements will take the form of awards of Xstrata shares conditional on the participant remaining in employment throughout the deferral period. The number of shares awarded will be determined by reference to the market value of the shares at the date the bonus payment is determined. The deferred elements have been treated as an equity-settled share-based payment in accordance with IFRS 2. In 2005 the Xstrata Remuneration Committee resolved that during the bonus deferral period dividend equivalents would accrue in relation to the deferral, to be delivered at the end of the deferral period and subject to the deferral award vesting. As dividend equivalents are receivable on the deferred amounts, the fair value of the deferral is technically equal to the value of the bonuses deferred. The total value of 2006 bonuses deferred was US$13 million (2005 US$7 million). The number of deferred shares for the 2006 deferred bonus is 291,585 (2005: 258,242). Directors’ Added Value Plan (AVP) The first cycle of the AVP began on 9 May 2005, and the second began on 10 March 2006. A description of the performance requirements and the vesting schedule of the plan are detailed within the Remuneration Report on pages 126 to 139. The fair value of the 2005 equity-settled share-based payment under IFRS 2 was US$7 million, estimated at the 9 May 2005, using a Monte Carlo simulation model to incorporate the market based features of the plan. The equivalent valuation of the 2006 award was US$7 million, estimated at 10 March 2006 using a Monte Carlo simulation model. For the 2005 plan cycle, the market capitalisation on the 9 May 2005 was US$11.4 billion, the Participation Percentage was equal to 0.5% and the share price at the measurement date was US$18.00. For the 2006 plan cycle, the market capitalisation on the 10 March 2006 was US$18.6 billion, the Participation Percentage was equal to 0.3% and the share price at the measurement date was US$29.39. 2006 Xstrata share Indices1 2005 Xstrata share Indices1 Xstrata plc Xstrata plc Dividend yield (%) Expected volatility (%) Risk-free interest rate (%) Third anniversary of start of cycle Fourth anniversary of start of cycle Fifth anniversary of start of cycle 1 N/A 30% 21% 4.45% 4.45% 10 March 2009 10 March 2009 10 March 2010 10 March 2010 10 March 2011 10 March 2011 N/A2 N/A 32% 4.51% 9 May 2008 9 May 2009 9 May 2010 N/A2 21% 4.51% 9 May 2008 9 May 2009 9 May 2010 There are two Xstrata Share Indices used within the valuation model; one is a market capitalisation weighted TSR index comprising 19 global mining firms who are considered to be Xstrata’s key competitors for both financial and human capital. The other is a market capitalisation price index comprising the same 19 constituents. 2 When simulating the Xstrata Price Index, a dividend yield is included to account for the suppressing impact that a dividend payment has on the constituent share prices. A yield of 3.00% has been used. For the simulation of Xstrata's TSR and the Index TSR a dividend yield is not required. The expected volatility reflects the assumption that the historic volatility is indicative of future trends, which may also not necessarily be the actual outcome. There is no disclosure of the number of equity instruments granted as the AVP is not an award over a fixed number of shares. Xstrata plc Annual Report 2006 | 275 10. Share-based Payments (continued) Directors’ Glencore Option As part of a package to attract him to take the position of chief executive of Xstrata AG in October 2001, Glencore International AG (Glencore) awarded Mick Davis an option over shares in Xstrata owned by Glencore, at an exercise price 46% higher than the share price on the day he joined and exercisable after three years from 19 September 2005 until 19 September 2011. Following the creation of the Company, the merger with Xstrata AG and the rights issue in 2003 associated with the acquisition of MIM Holdings Limited, the option was over 1,334,669 shares in the Company, owned by Glencore, at an exercise price of CHF13.60 per share. On 20 September 2005, these options were exercised and Mick Davis received from Glencore a cash consideration equating to the current value of the option (CHF26 million, representing 1.334 million shares at CHF19.70 per share, being the difference between Xstrata plc's closing price of CHF33.30 per share on Monday 19 September 2005 and the exercise price of CHF13.60 per share). The Group did not incur any costs in respect of this exercise. 11. Guarantees The Company has provided guarantees to a number of Group companies. Specifically, the Company has provided: To Xstrata Capital Corporation AVV in respect of the convertible bonds and debentures it has issued: – unconditional and irrevocable guarantees to the holders of the convertible bonds and debentures in respect of the payment of all amounts due and payable under the convertible bonds and debentures. The amount due and payable under the convertible bonds and debentures at 31 December 2006 is US$596 million (2005 US$989 million); guarantees to provide, in exchange for 589,419 (2005: 975,000) preference shares of Xstrata Capital Corporation AVV, ordinary share capital in the Company on the conversion of the bonds and debentures. The number of shares to be issued under these guarantees at 31 December 2006 totals 38,091,977 (2005: 73,281,309). These shares will be issued to the holder of the bonds and debentures in exchange for the preference shares in Xstrata Capital Corporation AVV they receive on conversion of the bonds and debentures; in February 2007, the Company issued 22,832,325 shares, in exchange for 199,689 preference shares in Xstrata Capital Corporation AVV following additional conversions by the convertible bond holders; and on 15 March 2007, Xstrata Capital Corporation A.V.V. exercised its right to call for the redemption of all of the outstanding convertible bonds. The terms and conditions of the bonds permit Xstrata Capital Corporation A.V.V. to redeem all of the bonds at their principal amount plus accrued and unpaid interest up to and including the date fixed for redemption, following the exercise of 85% or more of the convertible bonds originally issued. As at 14 March 2007, US$14,730,000 or 2.455% of the principal amount of the convertible bonds originally issued was outstanding. The date fixed for redemption by the Xstrata Capital Corporation A.V.V. is 16 April 2007. The last day on which conversion rights may be exercised by bondholders is 2 April 2007. – – – Refer to note 29 of the consolidated financial statements for further details. In November 2006, the Group issued US$2,250 million of capital market notes to refinance existing debt facilities. The notes are comprised of three tranches, a US$1,000 million ten year facility at a fixed interest rate of 5.8%, a US$750 million five year facility at a fixed interest rate of 5.5% and a US$500 million three year facility that bear interest at a rate based on LIBOR plus 35 basis points. The fixed interest facilities were issued by Xstrata Finance (Canada) Limited and the floating rate facility was issued by Xstrata Finance (Dubai) Limited. The Xstrata Finance (Dubai) Limited issue was guaranteed by the Company, Xstrata (Schweiz) AG and Xstrata Finance (Canada) Limited. The Xstrata Finance (Canada) Limited issues were guaranteed by the Company, Xstrata (Schweiz) AG and Xstrata Finance (Dubai) Limited. The Group assumed a number of senior debentures on the acquisition of Falconbridge Limited (refer to note 7 and 28 of the consolidated financial statements). Pursuant to the terms of the note indentures as amended by supplemental indentures, the Company has fully and unconditionally guaranteed in favour of the holders of the senior debentures the payment, within 15 days of when due, of all financial liabilities and obligations of Falconbridge limited to such holders under the terms of the senior debentures. The Group assumed preference shares on the acquisition of Falconbridge Limited (refer to note 7 and 28 of the consolidated financial statements). Pursuant to the terms of a guarantee indenture, the Company has fully and unconditionally guaranteed in favour of the holders of the preference shares the payment, within 15 days of when due, of all financial liabilities and obligations of Falconbridge Limited to such holders under the terms of the preference shares. 276 | Xstrata plc Annual Report 2006 Shareholder Information Head Office Bahnhofstrasse 2 PO Box 102 6301 Zug Switzerland Tel: +41 41 726 6070 Fax: +41 41 726 6089 Registered Office Panton House 25/27 Haymarket London SW1Y 4EN United Kingdom Registered Number 4345939 Registrars and Transfer Office Computershare Investor Services plc PO Box 82 The Pavilions Bridgewater Road Bristol BS99 7NH Tel: +44 (0) 870 707 1417 Fax: +44 (0) 870 703 6101 Currency election and divided mandate forms are available from: www.computershare.com Telephone helpline: +44 (0) 870 707 1417 Shareholder calendar 2007 Financial year-end Annual General Meeting Dividend record date Dividend payment date Interim Results Presentation 31 December 8 May 2007 27 April 2007 18 May 2007 7 August 2007 Enquiries If you would like further information on Xstrata please contact: Corporate Claire Divver +44 20 7968 2871 cdivver@xstrata.com Brigitte Mattenberger +41 41 726 6071 bmattenberger@xstrata.com www.xstrata.com If you would like to register to receive copies of Xstrata news releases or announcements, please contact us or register directly on the website at www.xstrata.com/register. Design and production – Cre8with.com • Illustrations – Mandy Pritty • Typesetting – Orb Solutions This report is printed on Revive 100 Uncoated which is made using 100% Post Consumer Waste (PCW). The pulp is bleached in an Elementally Chlorine Free (ECF) process. The manufacturing mill is NAPM and ISO14001 accredited. Printed by St Ives Westerham Press Ltd., who are FSC Certified, ISO14001 and CarbonNeutral.® Xstrata plc Bahnhofstrasse 2 PO Box 102 6301 Zug Switzerland Tel +41 41 726 6070 Fax +41 41 726 6089 www.xstrata.com